Please explain "hedging" to me like I'm a 1st grader

[rickf]

For me hedging has come down to reducing the risk to my overall account value, not a specific position.

IE, say I have 5 long stock positions. I may have 200 shares of SDS bought at various times (in blocks of 25 or 50) over a few weeks or months to 'hedge' my portfolio bottom line if/when the markets turn down. Since I started doing that, the loss on my total portfolio has never been more than 5% even though individual positions may be up more or down. So for me, that's working just fine as a 'hedge' --- if I was long-only, I'd prolly have been down 7-8% or more....right now I'm hovering around being up or down 2%. I adjust my SDS holdings accordingly as a result -- we get more bullish I sell some SDS and wait to buy it again much cheaper.

As I said so far so good -- but I hedge on a total portfolio basis not a per-position one.

 

[nonlinear5]

Quote from rickf:

IE, say I have 5 long stock positions. I may have 200 shares of SDS bought at various times (in blocks of 25 or 50) over a few weeks or months to 'hedge' my portfolio bottom line if/when the markets turn down. So for me, that's working just fine as a 'hedge' --- if I was long-only, I'd prolly have been down 7-8% or more....right now I'm hovering around being up or down 2%.

Wouldn't you accomplish exactly the same by simply reducing the size of your long position?

 

[rickf]

I don't want to do that - since Nov I have slowly been averaging into (both up and down) positions that I intend to keep for a long-term horizon. So moving the SDS hedge lets me control some risks w/o worrying about the 'noise' of the short term impacting the positions I am trying to build with a much longer timeframe in mind.

That's my take on it.....others may trade/invest differently.

 

[murray t turtle]

Quote from ByLoSellHi:



Isn't it really that simple?


Think of the airliner that 'hedges' against fuel prices going higher .....

================
Yes, its that simple-ABC1288ppp, as ByLoSellHi says;
i wish everyone communicated clearly,1st grade/+........................

Also, short LEH;
long CASH

or short C;
long CASH

And not a perfect hedge, but a profitable hedge-short C;
long cash/local bank,& long cash @ Chicago broker.

 

[indifference]

In Million Dollar Traders the hedging is to try and eliminate the risk from swings in the overall market. For example if you go long a stock that you expect to out perform the market, you can still lose money even if the stock outperforms because the overall market went down. By buying a stock that your research shows will outperform the market and shorting a stock in the same sector that you expect to under perform, you eliminate the risk from overall movements of the market. You will profit if the “good” stock does better than the “bad” stock, regardless of whether the overall market goes down, up, or sideways.

I don’t trade this way but that is what they were doing in the show.

 

[TraderZones]

Quote from stts:

Sometimes, I go long and short same stock same time. .

this is the same as being FLAT.