What are your thoughts on the art of hedging?
Many people use hedging. The main reason is to reduce risk in a trade. However, a series of hedges can also be a strategy to make money too.
I'm a pretty simple trader. I take straight forward buy or sell positions and calculate all the risk beforehand. Maybe my ignorant view is that hedging is done because there's a lack of confidence in a strategy. I would also assume that a lot of hedging is done after a trade is put on and when that lack of confidence kicks in when a position goes offside.
When I traded interest rate futures on the floor one of the said cardinal sins was not to spread out a losing position, i.e if you had an offside position in one month, not to spread it out with an opposite position in another month. It's a pretty bad hedging strategy. Quite often I went against that advice purely on the basis that I told myself that I would at least have some time to asses the bad trade and to look for a time to leg back out at a profit, or at the very least, break even or a smaller loss. It was probably a crap train of thought at the time but I managed to use it successfully a few times.
Reader Pred wants to know people's thoughts on hedging and it's a worthwhile subject to delve into so;
- Do you hedge as part of your strategy and why?
- What tools or trades do you use to hedge?
- When does it work and when doesn't it?
Give us your thoughts
Hedges: How do you cut yours?