Hedging sounds great in theory. It’s what institutions do. It’s what professionals talk about. And if you’ve ever been burned by a sudden market move, the idea of having protection in place seems like a no-brainer.
But here’s the truth — most retail traders don’t need to hedge. In fact, for the vast majority of traders, hedging is just an unnecessary complication that drains capital and kills returns.
Why Institutions Hedge — and Why You Probably Shouldn’t
I spent years trading in institutional environments, and hedging was a massive part of the job. I even built a system called the “Hedgerator” for my first trading desk, which helped us navigate the 2008 financial crisis.
While every other desk in the firm lost at least $100 million, we made $30 million because we had the right hedges in place.
But here’s the thing — institutions hedge because they’re managing massive portfolios with dozens or even hundreds of positions. A fund with billions under management can’t just exit a trade instantly if things go south.
They need protection in place to offset risk across multiple holdings.
Retail traders, on the other hand, don’t have that problem. Most of you aren’t holding 50 to 100 positions. And if you are, you probably shouldn’t be — because that’s not trading…
That’s running a mini hedge fund without the infrastructure to support it.
The Real Problem: Position Sizing
The reason most traders think they need to hedge is that they’re taking on too much risk in the first place. Instead of adding a hedge, just size your positions correctly from the start.
If you’re managing risk the right way, hedging is mostly unnecessary. The whole point of a hedge is to reduce exposure to market moves, but if you’re positioned properly, those moves shouldn’t be able to take you out in the first place.
This is where most retail traders go wrong.
They put too much capital into a single trade, panic when it moves against them, and then try to hedge instead of just managing their risk upfront. It’s backward.
Why Hedging Can Hurt More Than It Helps
Let’s say you put on a hedge to protect against downside risk. If the market drops, your hedge works, and you limit your losses. But if the market doesn’t drop and your original trade moves in your favor, guess what?
Your hedge loses money, cutting into your profits.
This is why institutions spend most of their time managing and adjusting hedges. It’s a full-time job, and they have entire teams dedicated to it.
If you’re a retail trader with a handful of positions, do you really want to spend all your time monitoring a hedge that might not even be necessary?
What You Should Do Instead
If you’re only holding a few trades at a time, your best bet is to skip the hedge and focus on:
- Position sizing: Make sure no single trade can wreck your account.
- Risk management: Define your max loss before you enter a trade.
- Spreads instead of single options: They naturally limit downside risk without needing extra hedges.
Hedging makes sense for institutions. For most retail traders, it’s just added complexity. If you want to reduce risk, start with the basics — size your trades correctly, manage your stops, and structure your trades in a way that doesn’t require a safety net.
Most traders don’t need more hedging. They need more discipline.
Kane Shieh
Kane Shieh Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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