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What is hedging in cryptocurrency trading?


Hedging? Inflation?

Perhaps.

Worry not. Institutions and the so-called deep pockets implement various trading strategies to protect their bottom lines.

One of them is hedging. In this case, traders/investors may opt to buy assets whose movements are historically known to diverge with assets they are 'escaping' from. This could be hedging stocks with gold, hedging Euro—fiat against inflation losses-- using Bitcoin/Bitcoin/both, and more.

However, in cryptocurrency CFD trading, hedging is interpreted differently.

Assuming a trader is unsure of how BTC prices would perform in the medium term. The news could be favorable, but technical candlestick arrangements are terrible to confidently open long orders. A trader may decide to go long and short on the pair simultaneously not to miss out on opportunities.

In this case, a trader can go ‘long’ with a standard lot of BTC/USD and sell the same lot size of BTC/USD.

When this happens, a trader is said to have hedged.

A trader stands to benefit if prices fall. They can take profit once confident bears are exhausted and wait for prices to recover to break even before exiting their long position. Alternatively, they can wait for BTC/USD to appreciate even more before banking profits on the same.

Still, hedging is risky, and caution—especially on risk management—must not be thrown to the wind.


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