Protect yourself from corrections according to Captain Trading

Every time I bring up the topic of hedging, there are many questions. You are absolutely right to show your curiosity about this, because it is an indispensable strategy. It is even essential for any market participant if he wants to preserve his profits both during small corrections of an uptrend and in times of crisis!

In this article I will try to answer as many questions as possible about this topic that is close to my heart. Since I share my knowledge and experience about trading, about on my blog dedicated to crypto trading or on my social networks with my free trainingsecurity is a central issue.

Hedging: advantages and disadvantages

Hedging is essential for any entity that wants to limit its losses or make a profit when prices correct downwards. Here are some tips to familiarize you with the concept of hedging.

  1. Properly hedging your risks allows you to go long (anticipate the upside) during uptrends. Your portfolio becomes “neutral” because it also anticipates possible corrections. In this case, your profit curve stabilizes instead of going negative.

With hedging, you can keep your risky assets while protecting the absolute value of your portfolio.

  1. Hedging is not infallible. Some days the upward swings in my portfolio are not significant. However, hedging my risky assets allows me to avoid large and regular downward swings in a market as volatile as the crypto market.

During major turbulence, I remain calm, even passive, and I “manage my risk”!

  1. The hedging strategy is like insurance, it’s expensive and not always useful, of course, but it’s essential to avoid ruin in the event of a disaster. Do not neglect the quality of your insurance!
  1. Hedging is insurance.

In the event of a significant drop in the price of my hedged assets or a crash in general, I try to limit losses. In the crypto sector, good hedging is essential!

  1. If your hedging is successful, it makes perfect sense to reinvest the recovered amounts into the assets that suffered losses to maintain your coin portfolio at the same level of value in FIAT. You can also decide to recover part of your investment and thus reduce your exposure.

Covering: 2 practical examples to illustrate my point

With the approach of the merger and the speculative bubble that this event caused, I noticed significant movements during my technical analysis, indicating an impending decline in prices.

A classic example of hedging is trading ETH for BTC. Thus, when the BTC / ETH pair is at an important support or the price signs the beginning of an upward trend, you can exchange your BTC for ETH.

Conversely, when the price of ETH against BTC reaches resistance or signs the beginning of a downtrend, we can exchange our ETH for BTC.

On each of these transactions, we increase our number of units of ETH or BTC.

In both of these examples, you don’t exit, you stay invested. However, you reduce the risk thanks to the recurring cycles noted in the BTC/ETH price.

Here we talked about simple hedging, because in practice there is no need for derivatives, which are sometimes more complicated to master than a simple purchase in spot trading. It will not be a very effective strategy either, but it is perfect for understanding the paradigm that the concept of hedging implies: reduce your risk as much as possible!

Captain Trading – Source: TradingView

Advanced hedging: An example with derivatives

In another example, I want to keep my ETH because I acquired it at a good price and I consider it a good long-term investment. However, this is not a good reason to remain passive and suffer the correction that comes with the braid directly!

For this example, let’s take 1 Ethereum that I decide to hedge with put options:

  • When I took a position, the price of 1 ETH was around $1800, so we can consider that my portfolio has a value of $1800.
  • I buy an option valid until November because I expect two scenarios:
    1. Ethereum price rejects the resistance at 2000 and re-enters its range on the downside.
    2. The price will drop after the merger.

I am buying $400 worth of options with a strike price of $2000 until the end of November. In this case $400 is my maximum loss if Ethereum explodes higher and moves above $2000 and I don’t sell my options until November.

However, note that if this had been the case, I would still benefit from the increase by keeping my ether.

  • But…
    1. If the price drops to $1300, Ethereum loses $500 in value.
    2. The put options I bought for $400 offset this value because I can sell them back for $900 to make a $500 profit on this position. So I have two choices:

have/ I decide to resell all my puts: I get my $500 back and I take 100% of my cover. In absolute terms, my capital remains stable at the moment, but it becomes vulnerable to the possibility of another correction.

w/ I decide to recover my losses when we hit support, but I keep $100 of put options and remain partially hedged. It doesn’t matter if I choose a or b, I can then decide to reduce my exposure or keep it by making ether purchases.

I place a crucial emphasis on hedging because it is a strategy to remain active in relation to my investments. This prevents me from suffering the damage of a bad financial situation while continuing to earn money.

On the contrary, hedging allows me to accumulate more while waiting for sunny days.

As you’ve probably gathered, hedging is an important strategy for traders, but it’s perfectly compatible with investing!

To learn more about trading, find me on my website or on my Youtube channel!

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The Cointribune Editorial Board

The Cointribune editorial team unites their voices to express themselves on topics specific to cryptocurrencies, investments, the metaverse and NFTs, while striving to best answer your questions.

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