Hedging Overview

Introduction

In this article, we'll explain what hedging is, why it's a powerful tool for traders, and how it works in the context of prop firm challenges. Hedging helps minimize losses by offsetting risk through a simple yet effective strategy of taking opposite trades in different accounts.

Hedging is a risk management strategy where you buy something to protect yourself against potential loss from another action. For example, purchasing a rain jacket is a hedge against getting wet in the rain. In trading, hedging means taking an opposite position in a separate account to reduce potential losses.

Instead of just trading a prop firm account, hedging involves trading two accounts simultaneously:

• Prop Firm Account: The account used for prop firm challenges.
• Personal Hedged Account: A separate account funded with a small amount of money to offset potential losses from the prop firm account.
  
  

By taking opposite trades in both accounts, you can balance out losses from one account with gains from the other.

Let’s say you’re taking a $100k prop firm challenge that costs $450. If you fail the challenge, you'd typically lose the $450 fee. However, with a hedged account, even if you lose money on your prop firm account, you can recover a significant portion of your challenge fee by making money on your personal brokerage account through opposite trades.

For instance:

• If your prop firm account is in drawdown (e.g., down 3% or $3,000) and is in all sell trades, your hedged account will take buy trades, which offsets the loss.
• The HedgeBot automates this process by taking opposite trades for you, ensuring the correct proportion to recover the challenge amount.
  
  

By hedging, even if you fail a challenge, you can recover around 90% of your challenge fee. For example, if you spend $450 on a challenge, and recover $405 through your personal account, you're only down $45 instead of losing the entire $450.

You might wonder: if we take opposite trades, doesn't that mean if we pass the prop firm challenge, we lose money on our personal account? Yes, but that's acceptable because:

• If you pass the challenge, you'll have access to a funded account, which offers the potential for future payouts.
• Even if you lose money on your personal account while passing the challenge, the net result is typically still profitable, thanks to your funded account and possible future earnings.
  
  

The HedgeBot is essential to the hedging process. It:

• Automatically takes opposite trades between your prop firm account and personal account.
• Ensures the correct proportion of trades to maximize recovery potential.
• Helps recover most of the challenge fee if you fail, while keeping potential gains from funded accounts.
  
  

Here’s how hedging plays out across the different phases of a prop firm challenge:

• Phase 1 (Challenge Phase):

  • If you fail: You lose your challenge fee, but make it back in your personal account, breaking even.
  • If you pass: You may lose money in your personal account, but you're on to Phase 2 with a small loss.

• Phase 2 (Verification Phase):

  • If you fail: You lose the challenge fee, but make more in your personal account.
  • If you pass: You move on to a funded account, with a small loss in your personal account.

• Funded Account:

  • If you fail to hit your profit target: You lose the challenge fee, but your personal account makes enough to break even.
  • If you hit your profit target: You make money from the funded account and future payouts.
    
    

Hedging is an intelligent way to reduce risk and protect your investments in the world of prop firm challenges. While not mandatory, it's a highly effective way to ensure that you're not left with significant losses if a challenge doesn't go as planned. The HedgeBot makes this process seamless and helps you minimize your downside risk while maximizing your chances of long-term profitability.

For traders, hedging offers the peace of mind of knowing that, win or lose, your losses are minimized, and your chances of success remain high.