What is hedging? Effective risk management strategies in crypto trading

Hedging is one of the most important risk management strategies that traders need to understand. It is not a way to make big profits, but a method to protect assets when the market shows signs of instability. What is hedging by nature? It involves simultaneously opening two opposite positions - a long (buy) and a short (sell) - on the same asset.

What is a hedging strategy and why is it necessary?

Unlike opening a single position, hedging creates a “safety net” when you’re uncertain about the market direction. Instead of choosing one side and accepting all the risk, you create two different positions to offset each other’s gains and losses. When the market is highly volatile and you lack clear signals, this strategy helps you still have a chance to profit without facing significant losses.

Two common hedging scenarios in trading

Scenario 1: Price is relatively high, you want to short but are unsure

When the price is high and you plan to short, you can establish a short position first, then open a smaller long position. If the price continues to rise, the long position will offset some of the losses from the short. If the price drops as expected, you close both positions at the same time - the profit from the short will cover part of the loss from the long, allowing you to still make a net profit, albeit smaller than just opening a short.

Scenario 2: Price is low, you want to buy but are not confident

Conversely, when the price is quite low and you want to go long, open a large long position first, then add a smaller short position for hedging. The mechanism works similarly - if the price does not increase as hoped, the short will offset some of the losses from the long.

Combining DCA with hedging - How to optimize profits

An interesting feature of hedging is that you can still apply the DCA (Dollar Cost Averaging) strategy on one of the two positions. This allows you to gradually increase or decrease your trading size depending on market developments. In rare cases, both positions can generate profits simultaneously - this is the “compound interest” that traders crave.

How to set up hedging on an exchange

The technical process to start hedging is very simple. First, you need to close all current positions. Then, access your account settings and look for the “hedging mode” option. Enable this mode, and now you are ready to open long and short positions simultaneously.

Hedging, at its core, is a smart risk management tool that helps you protect your capital during unstable market periods. It is not a way to “get rich quick,” but a way to “stay safe” when trading in an uncertain environment.