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What do Netting and Hedging mean?
What do Netting and Hedging mean?

A short description of the terms Netting and Hedging

The Amega Geek avatar
Written by The Amega Geek
Updated over a week ago

Netting and Hedging are popular Trading systems/strategies.

In case these words sound unfamiliar to you, we have compiled this article to help you better understand the terms and the differences between the two options.

What is Netting?

Netting is a position accounting system that allows a trader to hold open only one position on a specific asset. The volume of the position (in Lot) may vary depending on asset volume bought or sold during the position being open in the market.

Example:

A trader using the Netting system opens a Buy position on EUR/USD for 3 Lot. He later opens a Sell position on EUR/USD for 1 Lot. As a result, the position remains in the market, and its volume becomes 2 Lot.

3 Lot (Buy order) minus 1 Lot (Sell order) = 2 Lot

In other words, the positions will be summed up, and the volume will be averaged.

Advantages of Netting:

  • Easier to avoid getting locked in a trade by accident

  • A failing trade may be corrected by averaging (as the price of the first trade changes, the slump reduces, and the chance of closing your position with a profit increases)

  • It offers a more considerable advantage when trading stocks

  • Simpler risk management by focusing on one position to gain as much profit as possible

The main disadvantage of Netting is that it is impossible to set stop-loss and take-profit for each position separately.

What is Hedging?

Hedging is a trading system that allows a trader to open multiple positions simultaneously on the same or a different asset.

Example:

A trader using the Hedging system opens a Buy position on EUR/USD for 1 Lot. He later opens a Sell position on EUR/USD for 1 Lot. As a result, both the Buy and the Sell positions remain open simultaneously.

Advantages of Hedging:

  • Can open several positions on the same instrument

  • Offers protection from unfavorable conditions and reduces the chance of significant losses (by opening a buy and sell position on the same asset, if you lose on one position, your loss is mitigated by the profit from the other position)

  • You can apply different stop-loss and take-profit levels for each trading position

  • It is generally regarded as more flexible and potentially more profitable

The main disadvantage of Hedging is that your transaction lists can become too crowded and messy, making it hard to micromanage your open positions.

💡 Tip

Test both systems on your Demo account. See what works better for you.

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