Hedge mode is a trading strategy used by futures traders to manage their risk exposure in the market. Here’s how it works:
- Hedge mode is a trading strategy primarily used in futures trading to mitigate risk exposure.
- It entails opening both long and short positions on the same contract simultaneously to profit from market fluctuations while reducing potential losses.
- One-way mode permits a single-direction position, contrasting Hedge Mode’s dual-direction approach.
- Definition: Hedge mode involves opening two opposing positions—a long position and a short position—simultaneously on the same contract. The goal is to profit from market movements while minimizing potential losses.
- Risk Mitigation: By holding both long and short positions, traders can offset losses in one direction with gains in the other. This strategy helps reduce overall risk compared to having only a single-direction position.
- Comparison with One-Way Mode:
- One-Way Mode: In this mode, traders can only hold positions in one direction under a single contract.
- Hedge Mode: Traders can simultaneously hold positions in both long and short directions under the same contract.
Example of Hedge Mode
Suppose Ahmed Imran is trading BTC/USDT pairs in the Binance Futures market, using the Hedge Mode preference. Assuming he opens a 10 BTC long position and at the same time opens a 5 BTC short position in the BTC/USDT pair. If the BTC/USDT price moves from 26,000 USDT to 30,000 USDT, the net profit of his long position and short position will be as follows:
Net Profit/Loss = (Long Position – Short Position) * Profit/Loss
- (10 – 5) * (30,000 – 26, 000)
- 5 * 4,000 = 20,000 USDT
If the price moves declines instead, say from 26,000 to 21,000, the net profit would be:
- (10 – 5) * (21,000 – 26, 000)
- 5 * (-5,000) = – 25,000 USDT
Note that the potential loss is significantly less compared to if he had only opened a long position and the trend had not gone her way. Eg. 10* (-5,000) = 50,000 USDT