Hedging is an advanced risk management strategy to protect your trading portfolio.
This strategy involves opening multiple positions at the same time that have an opposing correlation with each other.
If one position declines in value, the other is likely to increase, which can help to reduce the loss taken in the event of a downtrend.
Daniel owns a lot of spot BTC and he does not want to lose massive amount of money on a drop in price.
For this reason, he will always look for hedge shorts at key resistance levels on the derivative pair to protect his spot positions.
In hedging part 1 we go deeper into the advantages, disadvantages and methods to get into a hedge position.
Time Stamps
4:46 – HEDGING WHEN TRADING
- Hedging is used to reduce the loss taken on an asset in event of a downtrend.
- One form is taking a reverse position of an already open trade.
- A common strategy is shorting BTC to hedge spot holding (it can apply to any asset).
- It makes it easier to focus/not stress about losses if the market drops (peace of mind during volatility or when not at the PC).
- It enables you to keep positions open for longer (position from the high and from the low open simultaneously).
- It can allow one to make sure profit on a trade is 100% secured.
- It may help with taxable events if you don’t want to close a long-term position.
- Hedging is very important when we believe the asset will drop if an asset drops and one does not have a hedge open against their spot or even worse only a leveraged long open then a massive loss can occur.
- Hedging reduces risks but also can reduce potential gains.
- If you are hedged and the price drops, the value of your portfolio stays the same but you have more BTC, and if the price goes up you have less BTC but the same portfolio value.
- If you are not hedged, you lose portfolio value when price goes down and gain value if price goes up.
- If you hold BTC offline, leverage can be used advantageously if used correctly. It is safer to start with smaller leverage and then increase it when probabilities go in your favour.
- On Bybit you can simultaneously open a long and a short position.
27:54 – EXAMPLE
36:54 – HEDGING WHEN TRADING
- Daniel always prefers to take shorts on BTC as if he is not in a leveraged position, when BTC drops he is losing a lot of value of his portfolio. Also, he gains more BTC with that.
- If he takes a hedge short and gets stopped out, he does not lose any dollar amount of value.
- He prefers not to lose any money than make money.
- That is why he always holds onto his short trades longer than longs. He waits for a significant sign of strength before closing a winning swing short trade.
46:46 – Q&A
- Trading with leverage does not change the way you manage trades.
- For example, Daniel is long-term bullish on DOT but is still shorting every rise as a hedge. When price breaks out, he can close the hedge and have a massive spot portfolio.
- You never know in which direction the range will break so it is sensible to have a long and a short open until the break happens.
- The vast majority of the time the funding will be paying shorts.
- When Daniel goes on holiday he does not place SL on a hedge.
1:03:36 – SUMMARY
- ‘There is only one thing that is more expensive than education and that is ignorance.’