Hedge

A hedge is a protective position against an open trade. You keep the main position and open a second one in the opposite direction, so a loss on one is partly offset by the other.

How it works

Hedging works like insurance. If you are long EUR/USD and fear a sharp drop, you open a short on the same or a similar pair. While both are open, price moves barely change the total result. A hedge can be full (same size) or partial (smaller size).

The catch is that a hedge also cuts your possible profit, and every extra position adds spread, commissions and overnight swaps. Some brokers do not allow an opposite position on the same pair at all, and in margin trading the hedge still ties up part of your margin.

People hedge before big news when they do not want to close a long-term position, or to protect a portfolio: for example, someone holding spot BTC may open a futures short. In crypto and forex it is a risk management tool, not a way to make money.

Example with numbers 1

You are long EUR/USD, and big news lands in an hour. You do not want to close the trade, so you open an equal short. While it stays open, the result barely moves. After the news you close the hedge.

Example with numbers 2

You hold 1 BTC on spot bought at $60,000. You open a 0.5 BTC futures short. Price falls to $54,000: spot loses $6,000, the short gains $3,000, so your net loss is $3,000 instead of $6,000 (before fees and funding).

Common mistake

Do not keep a hedge "just in case" for weeks. You pay for both positions and earn nothing. Another trap is using a hedge instead of a stop: the loss is just frozen, and you still have to take it later. Decide in advance when you will close the hedge or the main trade.

Questions and answers

What is hedging in simple terms?

It is insurance for a trade: you open a position in the opposite direction to limit the possible loss on your main one.

What is the difference between a hedge and a stop-loss?

A stop-loss closes the position and locks in the loss. A hedge keeps it open but adds a second position, and you pay spread and fees on both.

Can you hedge crypto?

Yes. Most often spot holders open a short on futures. Keep in mind that futures have funding and, with leverage, liquidation risk.

Hedge

How it works

Questions and answers

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