Hedge positions are a must-have in any trader’s arsenal. Knowing how to use the tool properly can protect capital and ensure profits at the same time. But not everyone knows what the advanced trading tactic really is, what it does, and why it matters, let alone how to execute on this.
We’re going to explain how hedge short positions were able to properly get traders on PrimeXBT into position ahead of the big crypto market correction and never again will you forget to consider a hedge short when markets are such on fire.
What Is A Hedge Position In Trading? Hedge Positions Explained
A hedge position is a position taken – typically against the primary open position – as a way to protect capital and potentially profit when markets look less clear and a trend could come to an end.
This is especially critical during powerful moves as when moves are so strong, the resulting correction is often equally as powerful. For example, when Bitcoin rallies it tends to run for hundreds to a few thousand percent but when it corrects it wipes out as much as 80% of those gains.
The latest correction has already wiped out more than 50 to 60% of most cryptocurrencies, Bitcoin and Ethereum included. Even when they were just so bullish and tripled in value in months. It is actually due to this reason that they have corrected so hard and why a hedge short at highs could have turned all the losses into profits instead.
It all starts with learning how to short Bitcoin. A hedge short during an uptrend is a vital tool during overbought conditions or when technical indicators are overheated. When Bitcoin was at its recent peak, technical indicators were showing bearish divergences everywhere yet somehow no one saw it coming.
Going short Bitcoin is a speculative bet that the cryptocurrency market will crash. When you short Bitcoin, you instead profit from a crash rather than losing during it. By holding Bitcoin, but hedging short, any investor can protect a spot position in BTC.
Alternatively, if a trader is already long Bitcoin during a huge uptrend like the one at the start of 2021, starting to hedge short when resistance builds can turn into a profitable surprise when it was intended to just protect from a crash.
How A Hedge Position Protects Capital And Keeps Profits Flowing
The opposite is true for anyone who was able to accurately short the top of the crypto market rally, and ride the short down to current levels. Rather than closing the short if they expect more downside, they can build a hedge long position in case the crypto market starts to climb once again
Cryptocurrencies are highly volatile assets that rise and fall rapidly and in an unpredictable manner. Because of this volatile nature, trading cryptocurrencies using long and short positions is far better than holding alone. If you must hold, hedging these positions with a short on Bitcoin during resistance can not only protect capital but also add to your Bitcoin stack with profits from a BTC based margin account like what is provided at PrimeXBT.
PrimeXBT traders also can use stop loss and take profit orders, technical analysis software, and much more. With these tools, not only can positions be better managed, but reversals and when to start hedging can be accurately predicted to some degree.
How To Properly Hedge Short Bitcoin WithPrimeBT
The next step is to learn when to start hedging short and that starts as we have explained with technical analysis software. PrimeXBT has tools from TradingView built in but dozens of alternative solutions exist. Having the software as part of the broker experience is a welcome addition however.
Using the Bollinger Bands, traders should look to hedge short at a couple different zones. The top of the bands is one place, or even after a close outside of the bands. Most price action takes place within the bands so shorting outside the bands can be a profitable strategy. Finally, shorting a breakdown or retest of the middle-BB can yield results.
The Relative Strength Index is a tool that measures when an asset is oversold or overbought. Hedging short when an asset is overbought makes sense, but oftentimes waiting for a second high with a divergence in the indicator can be even more successful.
The Ichimoku is a complex indicator so there is a lot here to take in. But when the tenkan-sen and kijun-sen cross it is a signal to hedge short. Traders can also hedge short if the cloud is bearish or at chikou span resistance.
The MACD is a momentum tool. But it can also signal when assets are oversold and overbought. Combining these signals is the key to using the MACD effectively. Hedge shorting when the two lines diverge heavily or when momentum crosses bearish can bring profitable results.
Simply hedge shorting at horizontal, diagonal, psychological, or mathematical resistance can be profitable. Psychological resistance refers to rounded or repeating numbers, or numbers of seemingly random significance. Mathematical resistance refers to Fibonacci levels.
Summary: Why Hedge Short Positions Matter
When traders think long and short positions they only tend to think of them as their primary positions, and ignore their use in building hedge positions. As we’ve explained, hedge positions are a necessary piece to the profit building puzzle that all traders should consider under certain conditions.
A hedge short or hedge in general isn’t always necessary, so look for any of the above signals or reaching resistance before attempting the advanced trading tactic. Lastly, making sure the trading platform you rely on offers such tools like long and short positions is necessary for success. Also be certain this platform allows for both positions to be open at once for hedge positions, otherwise there’s not as much flexibility.
The next time the market looks choppy and is losing momentum at resistance, consider opening a hedge short to protect capital and get positioned for profits during a downtrend.