Hi guys, hi from Andrea Unger, I often listen or read emails from people saying that they have a hedged position.
So what is a hedged position in this topic?
A hedged position is when you are long and short on the same underlying.
This is possible on some brokers and on some platforms.
For example Metatrader allows it, some brokers allow also to avoid this, so that if you are long and you open a short position what you do, what happens is that you go flat.
And this is what actually happens!
If you are long and you are short on the same market, practically you are flat! You are not hedged, but flat!
And when I hear sentences like “I have an open hedged position with a loss of a thousand euros!”
You have closed a position previously losing a thousand euros. This is the reality!
What is wrong in the hedging process?
The first thing is that really you are flat!
It is… it comes, derives from the idea that we manage the position.
So we have two open positions, one is long one is short and we say: “Ok I start closing the one making money and I will manage the losing one later on”.
So we start this mental process of managing positions, which can be fine on one side but normally this is also dangerous, because the concept of hedging from my point of view is really stupid.
Sorry about the word, but I can’t find a better word for this. The point that you are flat, so all you do is you pay extra cost to open another position having two positions you will have to close both on a second time and this will cost additional spread or commissions depending on the trading costs that you are facing.
On the other side, which is even more dangerous: this hedging approach, sort of psychologically keeps you from accepting the losses and losses in trading are normal.
To accept and cut losses is vital for any trader to survive and to keep on trading.
You have to accept losses, losses are part of your trading.
They are the costs of your business, so actually you cannot avoid losses and thinking that by hedging you postpone a loss and subsequently you are able to manage your position turning a loser into a winner, is something that is conceptually wrong, psychologically wrong for a trader.
I don’t mean that it’s impossible, it is possible it might happen!
You might be so good that you have two hedged positions with a loss in total, but you are able to close the winning one and later on to close the one which was losing (when it is winning).
You might be that good, this is fine, but this is only psychology.
It’s not trading, because what you are doing you are actually trading two different trades in different times.
You’re not hedging, waiting for better moments. And not accepting the losses is the psychological issue.
All you do is you pay more money so actually, why… I’ve never done and I will never do this!
Sometimes you also hear things like: “I’m long 1 DAX and short 5 mini DAX so I hedged the position!”
No! You just paid a lot of commission to your broker who is the only one happy because of this.
So actually hedging is not wise, it’s useless, it’s costly because of the commissions and it is psychologically dangerous because it keeps you from accepting losses in your trading.
That’s my opinion, this is it, I hope you got some benefit from this video, see you next time, ciao from Andrea Unger.