PostHeaderIcon Emergency Hedging

Stock TraderTrading involves having to deal with risks and other factors in order to be more successful. One of the ways many experienced traders practice in trying to reduce the effects of losses is through emergency hedging. This method helps traders avoid the damaging effects or negative events that may occur in the market.

Basic Definition

Hedging is essentially a way of trying to protect one’s investments and trades from possible losses due to negative events in the market. Some of these events may not be as predictable as other market factors and this is where hedging proves to be useful. It serves as simply an insurance against negative events and possibly reduce its effects on the overall trade.

Basic Example

Emergency hedging may not prevent a negative event from happening, but it can surely help reduce the possible effects of such events in relation to their market investments. One simple example of emergency hedging may involve the stock market. In order to protect a certain position, a trader may trade the same stocks at different stock markets.

In case of a negative event happening in one stock market such as an electronic breakdown that prevents trading at a very pivotal time of the day for a certain position, the trader uses hedging by having a position on another stock market in order to continue trading. This way the possible losses that a trader may experienced from one stock market may be canceled out by the gains from the other market.

Hedging Techniques

Although the idea behind emergency hedging may look simple, it can also become quite complex. Traders make use of a number of hedging techniques with their own complex means of offsetting losses. Traders usually make use of different trading combinations in different markets. Emergency hedging can be done through combining stock options and stock shares in trading.

Some may combine combine stock futures with stock shares. Others may trade equal stocks in both a European Stock Exchange and a US Exchange. There are also other complex combinations that require more experienced planning and considerations.



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