Why Hedge?

Even if you're a strict risk manager, black swan events can destroy months of careful trading in minutes. Hedging is insurance.

Hedging Methods for Retail Traders

#### 1. Correlated Pairs Hedging

Trade negatively correlated instruments. For example:

• Long EUR/USD + short USD/CHF (both trade USD direction)
• Long Gold + short Silver (when the ratio deviates)
• Long S&P 500 + short NASDAQ (mean reversion of the ratio)

#### 2. Option Hedging

The most effective (but costs premium):

• Protective put — Buy a put option on your main position
• Collar — Buy a put, sell a call (zero cost if strikes are chosen carefully)
• Tail hedge — Buy cheap out-of-the-money puts on the S&P 500 (costs 1-2% per year, pays 10-50x during crashes)

#### 3. Inverse ETFs

Keep 2-5% of account in the relevant inverse ETF when you expect volatility.

#### 4. Diversification Hedge

• Trade multiple uncorrelated instruments
• A forex trader should also trade indices
• An index trader should also trade commodities
• Don't put all capital in one strategy

When to Hedge

Cost of Hedging

Hedging isn't free. Options expire, inverse ETFs have decay, and correlated pairs drift. Accept the cost as insurance — just like home insurance, you hope you never need it.

Track your hedging costs and effectiveness in your journal to optimize over time.