Hedging your account

Hedging it's a clever way to prevent seeing your portfolio value plunging beyond recognition. Here there are my favorite three ways to hedge a portfolio.

1) Using inverse ETFs.

Assume you are bullish on a certain stock or ETF but you want to prevent a bad surprise. What can you do? Buying an inverse ETF it's a good idea to get some protection if market decides to go down. If you are bullish you need to allocate only a small percentage of your portfolio to inverse ETFs so you still leave room for growth on the upside. I do not trust 3xETFs, but this is me, I suggest you to use anything else.

2) Shorting stocks in a serious downtrend.

This is a very good strategy but you need a margin account. You need to short more than one stock since moves up or down in individual stocks can be wild. If market goes up, your winners will rally and the stocks you have shorted are still going to go down or at worst they may stay flat or go up a little bit. If market goes down a weak stock will most likely plunge making you more money (percentage wise) than you lose with your "longs". With these strategy you can increase the percentage of your short bets compare with the first strategy.

3) Using options

You can buy 100 long shares then buy an out of the money "put".  Say ABC stock trades at 50. You buy 100 shares then you can protect them with an OTM put, say at strike 35 or 40. If market goes down your OTM put will increase in value and you are going to recover some of the losses.

Of course you can use the 4th method, placing a STOP-LOSS. There are two problems with a stop-loss. First, if your stock touch the stop even for a split second your stock is going to be sold. Think about the "flash-crash" when DOW plunged 1,000 points in only a few minutes. Every single stop-loss was activated! Think about your stock being sold at 9,900 then seeing DOW at 10,900 just a few days later. Second, if you have a stop at, say, 45 and the stock gaps down to 40 overnight you are not going to sell your stock at 45 since there isn't going to be any buyers at that price, you need to settle for 40. If you use any of the 3 hedging strategies above you can afford to trade without stops. If you don't use them, then at least go for the 4th, the stop-loss, it's better than using nothing at all.