Cover or Hedge A Trading Position
Richard is asking, “Can you please explain what people mean “when they say cover a position or hedge a position?
“Does it simply mean that we’re placing a short term trade “in the opposite direction “of a longer term trade et cetera?”
Yes, Rich it can actually mean a couple of things. Sometimes there is a little bit of shared lingo in the finance world that can mean many different things. For example, if I’m trading the AUDJPY to the downside.
Let me just quickly open up the AUDJPY. So we’re trading the AUDJPY to the downside in today’s session. If I say that I’m gonna cover this position, it can simply mean that I’m liquidating the position so covering a long or a short position just means that I’m taking it off, or I’m closing it, or I’m liquidating that position, but for some other traders covering the position has a hedging meaning as well.
So hedging can mean like you say you either trade the opposite direction in terms of short term expectations to the opposite side and you can also hedge not only on the same pair, but you can also hedge on other pairs as well.
So for example, let’s say you have a short trade running on oil, you might consider taking a hedge in the short term not looking at trading oil itself but you can trade the USD/CAD. So obviously if we expect oil prices to fall, we expect USD/CAD to go up. So if you’re trading oil to the downside and you want to hedge this position in the short term, you can look for a potential downside move in the USD/CAD just as an example.
So a hedge doesn’t really need to be on the exact same currency pair, it can actually be on a currency pair or another instrument that is expected to move in the opposite direction in the short term to that. So that is also an example. But yeah, it can be various things.
Normally, cover just means that you close a position and like you said, the hedge means that you either take a trade in the opposite direction for the same instrument or another instrument or another currency pair that is expected to move in the opposite direction in the short term.