Futures Trading: What is Hedging?

The futures market offers traders the opportunity to show their talents. In addition to the possibility of buying futures contracts at a bullish price, or selling contracts when prices are bearish, there is also the opportunity to profit from the price gap between futures. Hedging refers to the simultaneous purchase and sale of two different types of futures contracts. In arbitrage trading, traders pay attention to the mutual price relationship between contracts, rather than the absolute price level, they think they are buying "cheap" contracts, and peers selling those "high-priced" contracts. If the direction of the price change is consistent with the original forecast, the trader can profit from the change in the relationship between the prices of the two contracts. Hedging profit trading plays a two-fold role in the futures market: First, the hedging method provides traders with hedging opportunities; second, it helps to re-distort the market prices back to normal levels. Therefore, for traders, it is necessary to understand the principle of hedging profit trading and master some trading skills.

When it is expected that there will be a change in the normal price gap between two futures contracts, the trader can use the spread to buy (sell) another while selling (buying) a contract. The contract is to be hedged on the contract if the market conditions are favorable to it in the future. The hedging trader should specify the price level at which the long or short trading position is established and the future hedging instruction at the level of the price gap.

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