I've been reading numerous posts and article on this topic recently attempting to understand the true benefits of hedging, but I still do not get it and watch it as a useless exercise.
Here what I have gathered and known so far:
1) Hedging reduces risk.
Average illuion given: You think EUR/USD will go up, so you long 50 Lots, Short 30 Lots to hedge position and if your wrong you will have lost less.
****My comprehension - Why not go Long 20 Lots because the internet position is 20, yes you shed less, but you gain significantly less if it goes up, why not take a smaller position to begin with?
2) Hedging with two inversly correlated pairs
Example: Long EUR/USD Long USD/CHF
****But isn't this similar to simply trading EUR/CHF?
3) Additional examples I have heard are
Let us say you have a very long trade that is up 50 pips. . .the weekend is coming and you're going to be out of town but you'd rather not give up the position. That means that you may take a brief position equal to your long position and conserve the 50 pips.
Let us say when you come back the market has resumed the uptrend and you think that your long position is nevertheless valid. . .so you shed the brief position and keep the long position. This might be useful because normally when you take a hedge, you do not need to supply the additional margin. . .meaning you do not really risk anything but the spread to preserve a position.
***Isn't this exactly the same as just shutting the position? Why not come back and restart the trend with a new commerce? Its not like your making any cash in the meantime Your hedging
My Comprehension of hedging is opening and closing transactions such that you reduce risk because in reality your just reducing your position, hence also limiting profit