What is hedging? How to use hedging strategies in trading

What is hedging? It is an important trading strategy that many investors use to minimize risk. Simply put, hedging is when you open two opposite positions simultaneously—one long (predicting price increase) and one short (predicting price decrease)—to protect your portfolio.

What is hedging and why do you need protection?

The hedging strategy acts as an “insurance” for your trading positions. When you’re uncertain about the market direction but still want to access an opportunity, hedging helps limit potential losses. Instead of investing all your capital in a single direction, you diversify risk by creating two offsetting positions.

Situations to use hedging in trading

When the market shows signs of rising but you’re hesitant:
You see the price high enough and want to short, but you’re not fully confident about a decline. In this case, open a large short position and simultaneously open a smaller long position. If the price continues to rise, the long position will offset part of the loss from your short. If the price drops as expected, you can close both positions, with the profit from the short offsetting the loss from the long, allowing you to still make a profit—even if smaller.

When the price drops but you want to go long:
Similar to the above but in the opposite direction. You establish a large long position and a smaller short position. The short position will protect you if the price continues to fall before recovering.

How to implement hedging and manage positions

Opening a hedge is very straightforward. First, you need to close all open positions on your account. Then, go to settings and enable hedging mode. Once activated, you can open opposite positions without closing existing ones.

An interesting point is that once you’ve set up a hedge, you can still apply the DCA (Dollar Cost Averaging) strategy on one of the two positions. This allows you to adjust the average cost of the position while maintaining protection from the opposite position.

Benefits of using hedging

The main advantage of hedging is reducing risk in uncertain market conditions. You can stay exposed to the market without worrying about significant losses.

A rare special case is when both positions are profitable at the same time, called “double profit” or compound gains. This occurs when the market moves strongly in both directions or when you adjust positions at advantageous times. Although rare, this is one of the attractive features of the hedging technique.

In summary, what is hedging? It is a powerful risk management tool that helps you trade with more confidence, especially in markets with unclear directions. With a simple setup through platform settings, any investor can use this hedging technique to protect their portfolio.