To hedge or not to hedge?

Hedging, or locking, is taking opposite positions on the same contract. That is , we have both open buy and open sell positions in the same contract, of course with the same amount of volume.

Lets say, we bought 1 lot of Hang Seng at 13850 because our analysis shows that its still bullish and there were 2 bullish harami. Unfortunately, about 15 minutes later, the price made a reversal, and our initial floating profit became a floating loss. So, we decide to hedge, Sell 1 lot at 13780. No matter where the market goes, our floating loss will remain at -70pts.

After 15 minutes we realised that our sell is making profit but our buy is making a loss. So, we decided to cut the Buy at 13710 for a loss of -140 pts. We are still profitable with our Sell , +70pts. Finally, we decide to liquid our Sell at 13640, for a profit of 140pts. With both positions liquidated, our trade is actually even. First we lost -140pts, then we gain 140pts. Were we profitable?


Many of my trainees asked, "Why are you not in favor of hedging or locking? Isn't that a risk management tool?". After having a good laugh, my usual answer will be, "Hedging or locking is actually a deferred loss." Why ?

Risk management is limiting our losses, by hedging, we limit our loss when the positions are locked. When we unlocked, we usually incur losses, like or not. My preference is stops, or stop loss. After liquidating our losing trade, our mind will have a better view of market's direction.

When I first started trading in 1987, one of the first lesson that I got from the market is loss. After reading a few books on trading, there is a common trait among profitable traders; they all learn every time they lose, yours truly included. But the wonderful thing is ; losses can be limited.

Sometimes I wonder, how some traders would prefer to hedge, maybe they prefer not to lose. But isn't that the same as, prefer not to learn?