What is Hedge - Risk management strategy in trading

Hedging is a technique of opening two opposite positions simultaneously to reduce market risk. Instead of waiting to fully determine the price trend, you can implement a hedging mechanism to protect your portfolio when the market is uncertain. This is a powerful risk management tool that helps traders maintain flexibility in volatile market conditions.

When to use hedging with a short position?

Suppose you see the price is high enough and plan to short, but you’re still unsure whether the market will continue to rise or reverse. Instead of just opening a pure short position, you can combine it by opening a smaller long position. If the price continues to surge, the long position will partially offset the losses on the short, helping you control losses. If the price reverses and drops, you can close both positions at the same time to realize profits, with the gains from the short offsetting the losses on the long, leaving you with a net profit.

Expand with long positions and downside hedging

The hedging plan also works similarly but in the opposite direction. When you perceive the price is quite low and want to increase your long exposure, you can open a larger long position combined with a smaller short position. If the market drops significantly, the short position will profit to balance the losses from the long. Conversely, if the price rises, the long will generate main profits while the short reduces overall gains, but you still end up with a profit.

Combining DCA with hedging – Optimizing your strategy

An interesting feature is that you can continue applying dollar-cost averaging (DCA) on one of the positions while maintaining the hedging mechanism. This allows you to accumulate more exposure on your main position while still holding a hedge to mitigate risk. In rare but possible situations, both positions can profit simultaneously—this occurs when the market makes a major move in the direction you predicted after you set up the hedge. At that point, you will earn compound gains from both sides.

How to activate hedging mode on the exchange

To start, you need to close all current open positions. Then, go to the settings of your trading account and enable the hedging feature. With this mode activated, the system will allow you to open two opposite directions at the same time. It’s important to understand that hedging is not a way to make big profits but a tool to preserve capital and manage risk effectively in uncertain markets.