I have been reading numerous posts and article on this topic lately trying to understand the true benefits of hedging, but i still don't get it and see it as a pointless exercise.
Here what i have gathered and understood so far:
1) Hedging reduces risk.
Typical example given: You think EUR/USD will go up, so you long 50 Lots, Short 30 Lots to "hedge position" and if your wrong you will have lost less.
****My understanding - Why not just go Long 20 Lots since the net position is +20, yes you lose less, but you also gain less if it goes up, why not just take a smaller position to start with?
2) Hedging with two inversly correlated pairs
Example: Long EUR/USD Long USD/CHF
****But isn't this similar to just trading EUR/CHF?
3) Other examples i have heard are
"Let's say you have a long trade that's up 50 pips...the weekend is coming and you'll be out of town but you'd rather not give up the position. So you can take a SHORT position equal to your long position and preserve the 50 pips.
Let's say when you come back the market has resumed the uptrend and you believe your long position is still valid...so you drop the short position and keep the long position. This may be useful because normally when you take out a hedge, you don't have to provide the extra margin...meaning you don't really risk anything but the spread to preserve a position."
***Isn't this the same as just closing the position? Why not just come back and resume the trend with a new trade? Its not like your making any money in the meantime that your hedging
My understanding of hedging is "opening and closing trades such that you reduce risk because in actual fact your just reducing your position, hence also limiting profit"
Here what i have gathered and understood so far:
1) Hedging reduces risk.
Typical example given: You think EUR/USD will go up, so you long 50 Lots, Short 30 Lots to "hedge position" and if your wrong you will have lost less.
****My understanding - Why not just go Long 20 Lots since the net position is +20, yes you lose less, but you also gain less if it goes up, why not just take a smaller position to start with?
2) Hedging with two inversly correlated pairs
Example: Long EUR/USD Long USD/CHF
****But isn't this similar to just trading EUR/CHF?
3) Other examples i have heard are
"Let's say you have a long trade that's up 50 pips...the weekend is coming and you'll be out of town but you'd rather not give up the position. So you can take a SHORT position equal to your long position and preserve the 50 pips.
Let's say when you come back the market has resumed the uptrend and you believe your long position is still valid...so you drop the short position and keep the long position. This may be useful because normally when you take out a hedge, you don't have to provide the extra margin...meaning you don't really risk anything but the spread to preserve a position."
***Isn't this the same as just closing the position? Why not just come back and resume the trend with a new trade? Its not like your making any money in the meantime that your hedging
My understanding of hedging is "opening and closing trades such that you reduce risk because in actual fact your just reducing your position, hence also limiting profit"