Dear readers. I hope you didn’t miss my recent article about hedging. This week I’m seeing wave of articles and posts on Square about different “smart” “hedging” strategies for us, retail traders.
I’m not saying hedging is wrong or it does not work. I’m saying it is much more complex than enabling hedge mode on futures or covering your spot holding with short.
If you try to implement these simplified “hedging” approaches you will fail, in worst case you will face liquidation, in best case you’ll miss profit. It will look like it works in a moment but such strategies will fail even in mid term. You don’t know greeks, statistics, normal and log normal distribution, derivatives and integrals. And even if you think you know them, most probably you don’t understand them as well as hedge funds and market makers and can’t apply them to finances. Moreover, you are missing essential tools used for hedging, like options write and low commissions. And you don’t have infinite supply of money like they do.
So what do we do to protect our capital?
1. Learn about Portfolio Management and money management. Diversify.
2. Don’t trade CFDs. If you want to trade them don’t use leverage. If you desperately want leverage, use 2x.
3. Apply risk management to your trades. Take profit, stop loss, don’t leave your trades unattended.
4. Enter and exit positions in stages. Don’t average down loosing trades.
5. If unsure - don’t trade. If you have headache or feel bad - don’t trade. Don’t overtrade. Don’t force trade. Don’t revenge trade. Don’t trade your hopes, trade what you see.
6. And leave complex hedging strategies to pros, we won’t be able to outsmart them.
If your capital is big and you trade big, you may need to apply complex hedging strategies. So you will learn them properly and you will see they are slightly more complex than long asset /short contract / long put.
