Before we dive into the technical details, let’s be clear about what hedging actually is. Hedging is NOT a way to trade both directions because you’re unsure about market direction. It’s NOT a strategy for beginners who want to “be right either way.”
Real hedging is a risk management tool used to protect existing profitable positions from temporary pullbacks while maintaining exposure to continued upside. If you’re thinking about hedging because you’re uncertain about direction, you’re probably better off just closing your trade and waiting for clarity.
Strategy 1: Protective Hedging (Lower Risk)
Purpose: Protect unrealized profits without trying to profit from the hedge itself
Skill Level: Intermediate
Risk Level: Low
Strategy 2: Swing Trading Hedging (Higher Risk)
Purpose: Profit from both the pullback AND continued upside
Skill Level: Advanced
Risk Level: Higher
Let’s explore each strategy in detail.
Imagine you bought 1 BTC at $80,000 and it’s now trading at $120,000. You have $40,000 in unrealized profits, but you’re worried about a weekend pullback. You don’t want to close your profitable long position, but you also don’t want to
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7 Responses
Thank you Annii, super helpful!
That helped loads thank you!
Love this! Great to come back to again and again.
BOOM! Masterclass in written form!
This is fantastic!
The Higher Risk
What if you’re wrong about the pullback bottom?
If BTC drops to $105,000 instead of $111,000:
You closed your short at $111,000 for $9,000 profit
But your long loses $15,000 from $120,000 to $105,000
Net result: You’re worse off than if you’d just held the long
You’re no longer hedged for the continued drop
(Hi Annii – please help me understand why partial recovery of pullback is worse off than if you’d just held the long)
That’s not what it’s saying. It’s saying if you get the pivot wrong because you’re trying to profit both ways instead of just taking profit on the long THEN opening a short then you’re worse off.