Hedging is one of the most popular systems of money management. With it’s simple methods you can get kind of insurance against negative events and losses. It can also give you a perfect winning combination, if you adjust it to one trading strategy with the 60% winning rate or more. It’s main goal is to help you minimize your losses and gain a more profits with every green trade. It is usually considered as a first step towards intelligent trading.
Let’s say that asset’s price is going in the right direction and most likely will close higher than the open price. However, there are still 5 minutes until the end of your trade and result can change dramatically in a second. You can secure your winnings by opening another trade with the same asset, but instead of choosing the same direction, you need to click on the opposite one. For instance, if you have Call option in your first trade, choose Put for your second one.
There are only 3 ways how your trades can end:
- Close price is higher than the open price. If your second trade was a Put option, you will win the first trade and lose the second one. Your loss from the second trade and profit from the first one will be 5% from the total loss of both investments (instead of 85%). As you can see, this method can help you to get secure against possible losses.
Close price is lower than the open price. In this case you will lose Call option, but win Put option in your second trade. Again, your loss will be only 5% of invested amounts.
Close price is higher for your first trade (Call option) and lower for the second trade (Put option). This is the best possible outcome, which will bring you double winnings.
Despite of all the positive sides, hedging should not be considered as an ultimate winning strategy, but it can be a real treasure in your money management.
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