# What is Hedging: Basic Risk Management Strategy in Trading

What is hedging? It is a trading technique that allows you to open two opposite positions simultaneously to reduce risk when the market is uncertain. In other words, what is hedging in the context of portfolio management? It’s a way to protect potential profits by creating a “safety net” when the market direction remains ambiguous.

How hedging works: Long-short position pairs

The core of this strategy is simple: you establish a long position and a short position at the same time, with unequal sizes. The primary position (longer) is your main bet, while the secondary position (shorter) acts as a shield.

This mechanism allows you to control potential losses. When you’re not entirely sure about the price trend, instead of exposing your entire portfolio, you can use two positions to “balance” each other’s risks.

Two common scenarios for applying hedging

Scenario 1: Expecting a market rise but want a safety net

When you believe prices will continue to climb but still want protection, open a large long position along with a smaller short position. If prices indeed go up, profits from the long position will outweigh and offset any losses from the short. If prices unexpectedly fall, the short position will start to profit, minimizing the negative impact on your entire portfolio.

Scenario 2: Want to short but cautious

Conversely, when you see signs of a decline and want to short but aren’t fully confident, open a main short position and a smaller long position. If prices drop as expected, the short profit will dominate. If the market unexpectedly recovers, the long position will supplement your gains.

Benefits and limitations of hedging

The biggest benefit is minimizing losses. Instead of relying on a single option, you create a safety net. In rare cases where the market moves strongly in both directions, both positions can profit simultaneously, creating a compounding effect.

However, hedging also has drawbacks. Transaction costs will be higher due to opening and managing two positions. Potential profits are limited because part of your capital is “locked” to protect against risk. This strategy is most suitable when you’re uncertain about the market direction and willing to sacrifice some profit to reduce risk.

How to perform hedging on a trading platform

Setting up hedging is very straightforward. First, close all current open positions. Then, go to the settings and activate the hedge mode. Once enabled, you can open both long and short positions without worrying about interference between them.

Interestingly, you can also combine hedging with a DCA (Dollar Cost Averaging) strategy — meaning continuously opening additional orders at different price levels on one of the positions to optimize your entry points.