Hedging

[Bill Chater]

Hi, can someone please explain to me what 'hedging' is and how it works. Cheers

[socrates]

You have, I am sure, heard the term "to hedge your bets". Well in simplest terms, it means to place bets that no matter what happens, you win either way.

On Betfair, you can do this, if you are patient enough. You can back, and lay horses, sports, whatever. You can back for a win, and lay it to lose. Sometimes those odds will drift into your favour, after backing it, and then you can lay it with another punter, so that either way you win, not big, but a sure thing.

Well the same concept in the markets, however you need to back different, but correlated things.
Eur / Usd and Usd / Chf, for eg. This is by no means a sure thing though, and at best you may come out even.
Sometimes people using hedging as a sort of means of a stop loss, or loss limitor, but this can go horribly wrong, and you end up losing both ways.

I hope this helps

[Bill Chater]

Ok, thanks socrates. I think I'll give hedging a miss then!!

[LelioBR]

You may use options to hedge your position.

For example, if you believe that usdjpy will appreciate and you want to earn some money from the interest rate differential, you could go long with USDJPY (likely no stoploss defined), and buy a put option to protect possible losses.

[PittsburghFX]

Originally Posted by LelioBR

You may use options to hedge your position.

For example, if you believe that usdjpy will appreciate and you want to earn some money from the interest rate differential, you could go long with USDJPY (likely no stoploss defined), and buy a put option to protect possible losses.

Lelio,

In all sincerity, that is the smartest thing I have heard on these forums in months. I have preached hedging ATM puts or calls with 6 mo's or more out, and most people do not even recognize it. Nice to hear there are more people out there than just me who see the value of buying insurance on your trade.

Anyone who buys and sells at the same time is ignorant of the laws of trading. It does not work in the long run and any broker who offers this option on their platform is feeding dumb money.

[LelioBR]

Thanks for your compliments, PittsburghFX.

Best regards,
Lelio.