Good Day Bloggers! This week in the blog we are going to tackle another question that I get from a lot of students. That question is should I hedge or should I not hedge and more importantly when should I hedge? This may not be something you think about when you first start trading as that is where you are using stop losses and they should be employed immediately and always as strategic points. For those Rookies who are steadily evolving into professionals, this concept will become more and more important as time passes because this is the most likely trajectory that your trading success will take.
So what is it that golfers and traders have in common? Well if you watch the guys and gals on the professional golfer’s tours you will see that their swings look effortless and this is because instead of swinging fast and hard like a lot of amateurs they have learned to swing easy and use timing and tempo to hit the ball and achieve the greatest result. This trait that golfers seem to have is developed over many years of practice and training and this is very much the same for traders. We have to study and practice over the years to perfect our timing and tempo in relation to the markets. This is where the question from above comes in, when should I adjust a trade? Hopefully, I can shed some light on when to hedge. The how-to hedge is a different conversation that needs to be explored before the when comes into play.
So I can think of a few ways to improve our timing and tempo when it comes to hedging positions. In my humble opinion, the timing of adjustments is one of the harder parts of trading but over time practicing good techniques can help us get in tune with this part of trading. The three things that immediately come to mind for timing adjustments is the breaking of trend lines and/or support and resistance, the closing above or below moving averages and finally the end of a range.
First, the breaking of trendlines or support or resistance is a very easy point to believe that an adjustment could be warranted. A quick example might be if one has an OTM bull put credit spread on and that spread has been placed below support where it should be then that would probably be a good time to make an adjustment to the trade. Secondly, is the crossing of moving averages. These crosses are followed by many and therefore they can act as support and resistance and therefore if a price closes above or below a moving average this is an important sign of impending change. Finally, the typical range that an equtiy moves can signal exhaustion of a particular move and can show slowing momentum easily on a chart and it is at these particular points where we can pay close attention to a turn and once it has confirmed its turn with movement in the opposite direction then this can be a good time to make an adjustment. A particular example might be if you are in a stock trade and the typical range is run and starts to fade then it could be a good time to put on a covered call and collect some premium.
Hopefully you can see from the examples above that timing adjustments can be important and it really is something you have to work on over time just as our golfer friends do but if you practice these adjustments you may just find that your timing and tempo improves and then you may experience the greatest result which is watching your equity curve rise.
Happy Trading All,
Coach “Old Money” Holmes