Monday, January 08, 2007

To Hedge or Not to Hedge?

As an Amateur Investor, I am not ashamed to say that I do not or did not have a clue to what hedging was. I usually see or read about investors hedging, but never really got the gist of what they are talking about or what they really meant about hedging. I have been reading a new book called "Forex Made Easy: 6 Ways To Trade The Dollar" by James Dicks. As anyone who has read this blog before knows I really want to get into forex trading. I've just started reading this book and found it interesting that the author talks about four mistakes investors make:

1) Trading against the trend- I've made this mistake, luckily I just had to wait it out and was able to make my gains back, but if I would have cut my losses and got back in at the bottom I would have done a lot better.

2) Don't listen to so called experts, they all have there own agenda. (So if I took his advice I shouldn't be reading his book) This part I get because most of the experts on TV, stockbrokers, etc... are pretty much looking out for there best interest. This is why I like to read blogs, I can usually find a lot of great information out there.

3) Unwillingness to sell. I guess this would be the Enron syndrome, where the boat is sinking and no one is getting out.

4) Getting emotionally involved. This is how I got into mistake number 1. I kept saying to myself "hey this is a good company they will come back", luckily they did, but what if they would not have. Leave emotions out, if the signs say get out, get out.

Anyway in between explaining the mistakes investors make, the author starts talking about how Forex can be a hedge to your stock market investments. The only problem is that he didn't explain what a hedge was and what I was getting out of it was to hedging was like diversifying, but it turns out that they are totally different things. Wikipedia says that a hedge is an investment that is taken out specifically to reduce the risk in another investment. So I guess what the author is saying about Forex is that you can use it to offset some of the risk of your stock market investment and vice versa. Though I still don't totally understand the whole hedging thing, at least I have kind of an idea what it is, If anyone out there can explain it better to me I would greatly appreciate it. Anyway I will keep you up to date on the book and on the more I find out about hedging.