Life is all about taking risks. There are very few scenarios where you can be 100% confident that a single action will have a guaranteed outcome.
It’s not impossible, but it’s improbable in most situations. For example, when you set up a company, you feel like it’s a good idea. You’ve done the necessary research, and everything is in the right place.
However, you don’t know for certain that it’s going to be profitable. Multiple risks can threaten its success at all times.
But all of your preparation tells you that it’s got a chance of succeeding so you take a gamble. This is just one example of how nothing is ever truly certain.
Investments and trading are no different when it comes to risk. When you speculate on a financial instrument, you’re taking a risk. You believe it has the potential to make money, but you accept that it’s not guaranteed.
The skill in trading is finding ways to manage and mitigate risk.
The more knowledge, experience, and skills you have, the more you can mitigate risk. Aspiring traders should endeavor to master as many of these techniques as possible.
However, there’s one strategy that experienced traders like to do in certain situations and that’s hedging.
It’s All About Calculated Risks
An effective way to hedge is by trading binary options. This style of trading allows you to speculate on price movements, rather than investing directly in an instrument.
Novices can use the Nadex™ Binary Options trading account to familiarize themselves with this technique. With a demo account, users can get access to more information on hedging in a cost-effective way (i.e. free).
What’s more, these types of trading accounts are an easy way to practice this strategy.
From there, any knowledge can be taken into a live trading market.
Of course, it’s not enough to know that hedging and binary options are a great pairing. You need to know how to hedge if you want to do it effectively. In simple terms, hedging involves taking two positions.
This allows you to either reduce or transfer risk. For example, let’s say you believe Company X will outperform Company Y in the coming years. However, you also know that the market is volatile.
To reduce your risk, you go long on Company X and go short on Company Y. This means you’re investing in Company X and expect to make money when its value increases.
Additionally, you’re betting on Company Y losing money. Therefore, you can make money if the market is strong or if it takes a downturn.
Hedging is Something We All Do
Even if you’re new to trading, hedging should feel like a concept you can master because it’s something we all do in everyday life. Take, for example, the act of buying house insurance.
You pay a certain amount each month to cover the cost of repairs in the event of an accident.
You might not ever make a claim. However, you pay because, without insurance, the expense of repairing your house could leave you broke.
So, you’re paying the monthly charge to reduce your risk in an adverse event.
This is the same as hedging in the financial markets. You’re taking two positions which, in turn, means you’re paying an extra charge. This extra charge allows you to reduce your overall financial exposure.
Again, there are no guarantees in trading or life. But, with the right tactics, you can learn to manage risk and give yourself a better shot at making money.
Indeed, many professional traders will combine hedging and binary options to make money.
It’s not a risk-free way of trading but it is a highly effective way of managing risk which, as a trader, should be one of your primary goals.
So, it doesn’t matter if you’re starting off with a demo trading account or entering a live market, make sure you’re prepared to hedge binary options if the opportunity arises.