Hedging in trading is a strategy used to manage risk. It involves taking an opposite position in an asset to (offset) – (ชดเชย) potential losses in another holding. Imagine holding an umbrella (hedge) to protect yourself from the rain (potential loss) – (การสูญเสียที่อาจเกิดขึ้น).
Here’s a breakdown of hedging:
- Risk Management: Hedging is a (defensive strategy) – (กลยุทธ์การป้องกัน) to limit downside risk, not necessarily to maximize profits.
- Offsetting Positions: You enter a new trade that counters your existing position. This means if the price of your original asset goes down, the value of your hedge goes up, reducing the overall loss.
- Derivatives: Common hedging instruments include options and futures contracts, which are financial agreements based on the underlying asset’s price.
Here’s a simplified example:
- You buy 100 shares of a stock at $30 each.
- Worried about a price drop, you buy a put option (a type of hedge).
- If the stock price falls, the put option increases in value, offsetting some of your losses in the stock.
Important to Remember:
- Hedging comes at a cost. You’ll pay a premium for the hedge, which reduces your potential profit if the market moves favorably for your original position.
- Hedging is a complex strategy. It’s generally not recommended for beginner investors.