Hedging Strategies 2021 | Guide & Tips for Beginners
Learn everything you need to know about hedging and the different hedging strategies you can start implementing today, Read Our Guide | TradeOr
One way investors protect themselves against losses is by using hedging strategies. This can be a highly effective technique to mitigate your losses, but it can also limit your gains.
Hedging techniques can be used across all markets. You can use hedging techniques in forex (foreign exchange), the stock market, cryptocurrency and so on. Companies themselves can use internal hedging techniques to reduce risk. Hedging can be an important part of a trader’s tactics, but they need to be carefully thought through. The trading platform you use is another essential element. Some online brokers simply do not have the functionality available to employ certain hedging strategies.
Imagine a horse race. You bet on the horse with the shortest odds but that’s no guarantee he’ll win so you place other bets. Maybe you make agreements with other punters to split profits and share losses. The odds on your horse may get shorter still so you buy another ticket with fixed odds to “lock–in” the initial price offering. The only downside is that all these extra bets and price lock-ins could be eating away at your profits had you simply stuck to your one bet.
It’s not a perfect analogy, but you get the idea. There is a huge creative range for essentially protecting your capital by having a diverse portfolio and positions, which include options, swaps, forward contracts and futures contracts. These financial instruments are known as “derivatives” (a sub-contract on a particular asset). An options contract is a way to “lock-in” an asset’s price (like with the racing bet). The agreed price is known as the ‘strike price’. If the stock plummets, you will be able to rescue the funds tied into this strike price. Swaps are agreements between two parties to share a part of their cash flow. If one party has a high-risk income (such as through variable interest rates), they can reduce their risk by creating a swap contract with somebody with a low-risk income revenue.
A forward contract is a fully customizable contract for both the buyer and the seller to agree on the sale price. It may sound simple, but its open nature can lead to a number of risks. Finally, futures contracts are similar to forward contracts, without the complex negotiations. The buyer and seller simply agree a “future” sale price.
Action The Strategies
When you have chosen the right style of hedging, you will need to find an online broker which is fit for purpose. TradeOr is likely to fulfil all your requirements. It has a big market range from which you can select your assets. It also has the in-built technology to give you lots of freedom in terms of creating a diverse set of hedges against price drops. TradeOr has a number of free tools to use to analyse market data and your own performance. If you want to practice your hedging skills, there is an option to setup a ‘demo account’. This also gives you the chance to test out the capabilities and performance of the trading platform itself.
Hedging strategies are used to protect your investments in the case of a downturn in price. Used well, they can be an excellent insurance policy against the inevitable uncertainties of trading. There are a number of different techniques for doing this. Some derivative contracts suit certain markets and exchanges, but they are also determined by personal preference and finances. TradeOr is the broker which can facilitate all of this. It has an excellent reputation in the industry, and it can be effectively trialled completely free of charge.