Chapter 14

Cross-Hedging Strategies

If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties.

—Francis Bacon

Most traders perform best in a bullish setting; however, they suffer losses when equities markets confront a downturn. Adopting a cross-hedging strategy is particularly good for those individuals who have difficulty timing the direction of the market, but fare better at stock picking good plays over bad.

This strategy pits two forces against one another. For instance, given two instruments, you want two opposing trading positions: taking a long position in the one with the better probability of success and shorting the one that is likely to underperform.

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