When to Use a Basic Hedging Strategy
When to Use a Basic Hedging Strategy
Welcome to the world of crypto trading! If you hold assets in your Spot market wallet, you are exposed to price drops. A Simple Hedging Using Crypto Futures strategy can help you manage this risk without selling your underlying assets. Hedging is like buying insurance for your portfolio. This guide explains when and how to use basic hedging techniques, often involving Futures contracts, to balance your risk.
What is Basic Hedging in Crypto?
At its core, hedging means taking an offsetting position in a related security or market to reduce the risk of adverse price movements in your primary holding. For most beginners, this involves holding physical crypto (spot) and simultaneously opening a short position in the futures market.
If the price of your spot asset drops, the profit from your short futures position can offset, or "hedge," those losses. This is a key aspect of Balancing Spot Holdings and Futures Exposure.
When Should You Consider Hedging?
You should consider a basic hedge when you are generally bullish or long-term bullish on an asset but anticipate a short-term pullback or increased volatility.
1. Anticipating a Short-Term Correction: You believe the price has risen too fast and a temporary dip is likely, but you do not want to sell your assets because you expect higher prices later. This is where Using Long Futures to Protect Spot Assets might be too complex; a short hedge is simpler. 2. Preparing for Major Unscheduled Events: Before a major regulatory announcement, a significant network upgrade, or macroeconomic news that could cause sudden market turbulence, hedging provides a safety net. 3. Managing Existing Large Gains: If you have significant unrealized gains in your spot holdings, a partial hedge can lock in some of that profit protection while allowing your spot holdings to continue appreciating if the market moves higher. This relates to Balancing Spot Gains with Futures Management.
Partial Hedging: The Beginner's Sweet Spot
Full hedging (hedging 100% of your spot exposure) is often too restrictive, as it limits your upside potential entirely. Partial hedging is usually the best approach for beginners.
Partial hedging means only opening a short futures position equal to a fraction of your spot holdings (e.g., 25% or 50%). This allows you to protect against moderate downturns while still benefiting significantly if the market continues to rise.
Example of Partial Hedging Ratios:
| Spot Holding Size (BTC) | Hedge Size (Short BTC Futures) | Net Exposure if Price Falls 10% |
|---|---|---|
| 10 BTC | 0 BTC (No Hedge) | Lose 1 BTC value |
| 10 BTC | 5 BTC Equivalent (50% Hedge) | Lose 0.5 BTC value (offset by futures profit) |
| 10 BTC | 10 BTC Equivalent (100% Hedge) | Near zero change in total portfolio value |
When deciding how much to hedge, always consider your Spot Trading Liquidity Considerations and your overall risk tolerance. Remember that maintaining a futures position requires maintaining sufficient collateral in your Spot Wallet Versus Futures Margin Balance. Always check your Platform Feature Essential Security Deposits requirements.
Using Indicators to Time Your Hedge Entry
A hedge isn't just about *when* to protect, but *when* to initiate that protection. Using technical indicators can help you time when the market is most likely to reverse or stall, making it an ideal moment to open a short hedge.
Relative Strength Index (RSI)
The RSI measures the speed and change of price movements. When the RSI enters overbought territory (typically above 70), it suggests the asset might be due for a pullback.
Actionable Step: If your spot asset shows an RSI reading above 70, this is a strong signal to consider opening a partial short hedge. You are betting that the recent buying pressure is unsustainable. You can learn more about timing entries using this tool in Entry Timing with Relative Strength Index.
Moving Average Convergence Divergence (MACD)
The MACD helps identify momentum shifts. A bearish divergence, where the price makes a higher high but the MACD makes a lower high, often precedes a price correction.
Actionable Step: Look for a bearish divergence on the daily or 4-hour chart. This signals weakening upward momentum, making it a good time to initiate a hedge to protect existing spot gains, as discussed in Exit Signals Using Moving Average Convergence Divergence.
Bollinger Bands
Bollinger Bands measure volatility. When the price touches or moves outside the upper band, it suggests the price is temporarily stretched too far from its average.
Actionable Step: If the price hits the Upper Band and fails to close strongly above it, this suggests a potential short-term ceiling. This is a tactical entry point for a hedge, as detailed in Bollinger Bands for Volatility Entry Zones.
Timing Your Hedge Exit
A hedge is temporary insurance. You must know when to remove it so you can fully participate in the next upward move. You should look to unwind your hedge when:
1. The original reason for hedging is gone (e.g., the major news event passed without incident). 2. Indicators suggest the pullback is over. For example, if the RSI drops back below 50 and starts turning up, or if you see bullish crossover signals on the MACD. 3. When you decide to take profits on your spot holdings, you should simultaneously close the corresponding hedge position. Check out When to Unwind a Simple Hedge Position for more detail.
Psychology and Risk Management
Hedging introduces complexity, which can lead to new psychological challenges.
Over-Hedging: Fear can drive traders to hedge too much (100% or more), effectively turning a long-term bullish position into a neutral one, causing them to miss out on significant upside. Stick to your predetermined partial hedge ratio.
Forgetting Fees: Every futures trade incurs costs. You must factor in Platform Feature Know Your Trading Fees. If you hold a hedge for too long, the combined fees and the negative impact of funding rates can erode the protection you gained.
Risk Note: Hedging with Futures contracts involves leverage, even if you are only using them defensively. Ensure you understand margin calls and liquidation risks associated with your futures account, separate from your Spot Trading Profit Taking Techniques. While this strategy is about protection, improper management can still lead to losses on the futures side.
For further reading on related risk management, consider exploring topics like Spot Versus Futures Risk Allocation.
See also (on this site)
- Spot Versus Futures Risk Allocation
- Balancing Spot Holdings and Futures Exposure
- Simple Hedging Using Crypto Futures
- Using Long Futures to Protect Spot Assets
- Short Futures for Portfolio Downside Protection
- Entry Timing with Relative Strength Index
- Exit Signals Using Moving Average Convergence Divergence
- Bollinger Bands for Volatility Entry Zones
- Identifying Overbought Conditions with RSI
- Using MACD Crossovers for Trade Signals
- Bollinger Band Squeeze Entry Strategy
- Managing Fear of Missing Out in Trading
Recommended articles
- The Basics of Trading Futures with a Short-Term Strategy
- Long strategy
- How to Use Risk-Reward Ratios in Crypto Futures
- How to Use Keltner Channels in Futures Trading
- How to Use Volume Profile for Identifying Support and Resistance in Crypto Futures Markets
Recommended Futures Trading Platforms
| Platform | Futures perks & welcome offers | Register / Offer |
|---|---|---|
| Binance Futures | Up to 125× leverage, USDⓈ-M contracts; new users can receive up to 100 USD in welcome vouchers, plus lifetime 20% fee discount on spot and 10% off futures fees for the first 30 days | Sign up on Binance |
| Bybit Futures | Inverse & USDT perpetuals; welcome bundle up to 5,100 USD in rewards, including instant coupons and tiered bonuses up to 30,000 USD after completing tasks | Start on Bybit |
| BingX Futures | Copy trading & social features; new users can get up to 7,700 USD in rewards plus 50% trading fee discount | Join BingX |
| WEEX Futures | Welcome package up to 30,000 USDT; deposit bonus from 50–500 USD; futures bonus usable for trading and paying fees | Register at WEEX |
| MEXC Futures | Futures bonus usable as margin or to pay fees; campaigns include deposit bonuses (e.g., deposit 100 USDT → get 10 USD) | Join MEXC |
Join Our Community
Follow @startfuturestrading for signals and analysis.