Hedging in trading refers to the practice of taking positions that offset potential losses in another investment. It's commonly used to manage risk. Here are a few methods widely used:
1. Options: Buying put options gives you the right to sell an asset at a specific price, protecting against a potential decline in its value. Similarly, buying call options can help protect against a rise in price.
2. Futures Contracts: These allow you to agree to buy or sell an asset at a predetermined price on a future date. By taking an opposite position to your existing investment, you can hedge against potential price movements.
3. Diversification: Spreading your investments across different asset classes, sectors, or geographical regions can help reduce risk. If one investment performs poorly, others may offset the losses. this approach works well if you have large sum of investment else yours gains become negligible with diversification of small amount.
4. Short Selling: This involves selling borrowed shares with the expectation of buying them back at a lower price. It can be used to hedge against a decline in the value of a particular asset.
Remember, hedging strategies have their own complexities and risks. It's essential to thoroughly understand the mechanics wity deep research and study before implementing any hedging techniques. I personally do not apply option s and futures, still not comfortable with f&o risks. Do share your experience with hedging and other hedging strategies. Cheers
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