Based on feedback from readers, most seem to have understood the hedging concept as outlined in my new e-book pretty well. One reader had this to say:
Many thanks for your post on hedging.
Can you please clarify my thinking: After buying couple of long positions and one short position, do we make the following implicit assumption?
Do we assume that the long position will give higher gains than the loss from short positions – if the market goes up? Also do we assume that the short positions will go up higher than the losses from the long position going down – if the market goes down?
Is this the implicit assumption in the hedging examples you gave in the booklet?
Is hedging going to be more profitable than being on the sidelines in a money market fund?
Can you please clarify why hedging should result only in positive outcomes? Is it equally possible that hedging will do worse than being in the money market fund?
Is not the outcome from a hedging strategy a function of the funds and the short position chosen? I am confused.
The idea is for us to enter the market at an earlier time, after a bottom has been formed, prior to our Trend Tracking Index (TTI) signaling a buy. This early entry will allow us to participate to some degree in any uptrend that materializes. I say to some degree, because at that moment we are holding a hedged position and are not outright long, which limits our potential gains.
On the other hand, as you can see by the examples in my book, if the bottom suddenly drops out and the markets head south, we are well covered and can make money at that time as well.
My idea is not, as you mentioned above, to make this a substitute for being in a money market fund. You are still invested in equity positions and have market risk no matter how well you are hedged. However, you enjoy far more protection from market swings than if you were outright long or short.
To be clear, there will be times when the hedge may not work as well, but I personally prefer the reduced risk, especially when engaging in some bottom fishing. Be sure to follow the five rules as outlined, which will increase the odds of you being successful.
If you are hesitant at all, test it out yourself. Put on a small hedge in an IRA account (so you don’t have to deal with taxes) and invest based on my ideas. Be sure to track your positions on a spreadsheet matrix like shown in the book so you get the feel as to how this hedge moves, before committing a larger amount.