Hedging Your Bets, meaning the difference between being too conservative and being too aggressive is a very real and very important skill to possess. Although there are many great traders that have succeeded despite this being an often neglected aspect of their game, it’s not something that will be forgotten quickly by either the newcomer or the seasoned veteran. That’s because the first mistake that a lot of traders make is failing to learn how to hedge their bets.
Why is hedging important? Well in essence, it ensures that you don’t lose your entire account (i.e. when one big move causes you to lose everything) or risk losing everything (i.e. when one small move is enough to wipe out your entire account).
So how do you ensure that you’re not losing all your money when it comes to big moves and huge profits? If you only trade with money that you can afford to lose, then you’re gambling on the chance that the market will eventually continue to increase in value for the foreseeable future.
In reality though, any moves that you make, no matter how small differences in price or value from one currency pair to another, will eventually impact the total amount of money that you earn or lose. This is why you need to hedge your bets or not lose them.
It is actually important that you start off your trades on the smaller side or the side that’s underperforming, and it is also important that you take some time to get used to your system before you start to really start taking trades. If you don’t know what you’re doing, then your trades won’t be as profitable as they could be and you may find yourself more often than not losing your entire account in the process.
Hedging means the process of having a plan before you go out and try to make the best decisions possible. The reason that you need to hedge your bets or not to lose them is because every decision that you make is going to affect the overall amount of money that you will earn or lose.
If you make decisions that are based solely on emotion, on whether or not the market is going to move in your favour, you’ll end up with huge losses instead of huge profits. It’s easier for people to make emotional decisions if they don’t know how to make logical decisions.
Also, one of the most common mistake that people make when it comes to hedging their bets is that they are over-risking their positions or that they are not diversifying their trading portfolio. You may think that you’ve got all the stocks in your portfolio, but remember that some of them may fall over a period of time, so if you’re hedging your bets, make sure that you’re spreading your bets.