In the trading world, prop firms use hedging strategies to protect capital and ensure stable profits against market fluctuations. Applying hedging strategies helps control risks and maintain sustainable trading performance. This article by PF Insight will analyze the principles and how prop firms implement hedging strategies in practice.
Hedging, also known as a risk-hedging strategy, is a method of opening opposite positions to limit losses when market prices change suddenly. Traders often open opposite positions on the same asset or highly correlated products. This approach helps balance risks and keep profits stable despite strong market fluctuations.
For example, a trader can open a long position on EUR/USD and simultaneously sell GBP/USD. This reduces the risk of short-term fluctuations in the exchange rate, thanks to the correlation between the two European currencies in the same market conditions.
Why do prop firms use hedging strategies?
Why do prop firms use hedging strategies?
Prop firms use hedging strategies to protect capital and ensure stable returns in volatile markets. At the same time, hedging also helps stabilize performance, manage risk for traders and maintain long-term sustainability for funded accounts.
Preservation of capital and profits: The main goal of prop firms using hedging strategies is to protect capital and maintain sustainable profitability over time. Because they use the company’s capital to trade and provide capital to traders, they need to minimize the impact of market fluctuations. Therefore, hedging strategies are considered an important solution to help control risks, limit losses and maintain stable trading performance.
Risk reduction: When the market is volatile or there is unexpected economic news, proprietary trading firms often open hedge positions in the opposite direction to reduce risk. As a result, losses from the main position can be offset by profits from countertrades, helping to maintain balance and account stability more effectively.
Impact on trader psychology: Prop firms using hedging strategies also bring great benefits to traders’ trading psychology. When risks are effectively controlled, they feel more secure and can make decisions based on analysis instead of emotions. This helps to limit mistakes, improve discipline and effectively protect the capital of the proprietary trading firm.
Maintaining stability for funding accounts: Applying a hedging strategy allows the proprietary trading firm to ensure long-term operational stability while minimizing risks for funded accounts. This approach helps to strengthen investor confidence and affirms the company’s position in the international financial trading environment.
Strategies hedging is popular in prop trading
Prop firms often use a variety of hedging strategies to optimize their risk management capabilities. Each method is effective in protecting capital. As a result, they can limit losses, balance their portfolios, and maintain stable performance even when the market is volatile.
Direct hedging: This is a form of hedging in which a trader simultaneously opens buy and sell orders for the same asset to reduce the impact of price fluctuations. This method is easy to implement but not all exchanges allow it due to concerns about manipulation or violations of internal trading regulations.
Cross hedging: Prop firms use this hedging strategy when two assets are closely correlated but not exactly the same. Traders can open positions on two different instruments to balance price fluctuations. For example, they can buy crude oil futures and sell an energy ETF to diversify risk and stabilize the portfolio.
Options hedging: This strategy helps traders protect their portfolios from unexpected market movements. By purchasing call or put options, they can profit when the price of the underlying asset moves in the opposite direction of their main position. This method not only reduces risk but also optimizes the ability to control profits in trading.
Futures hedging: This is a popular strategy not only in the commodity market but also widely used by proprietary traders. By opening a position on a futures contract, traders can lock in a desired price and minimize the risk of market fluctuations. This helps them better control costs and protect profits more effectively.
Some important principles in hedging strategies
Before implementing hedging, traders need to understand the main evaluation rules such as determining profit targets, risk tolerance, appropriate hedging tools and position holding time. Adhering to these rules helps to optimize hedging efficiency and limit potential losses.
Some important principles in hedging strategies
Regulations on capital withdrawal
Prop firms use hedging strategies to manage risk and protect traders’ accounts, but they still impose strict withdrawal limits. Typically, there are two types of limits: daily withdrawals and maximum withdrawals. Daily withdrawals usually do not exceed 5%, while the total maximum withdrawal is around 10%. If a trader exceeds this threshold, the account may be closed immediately. Trying to use hedging positions to circumvent this rule is ineffective, as proprietary trading firms will calculate the total risk of both positions at the same time.
Profit target
In proprietary trading firms, profit targets are designed to test a trader’s ability to generate profits and manage risk within a limited timeframe. Typically, each evaluation period requires a return of 8% to 10% over a 30-day period. With a two-phase model, the trader must achieve 8% in the first period and 5% in the second period. Hedging strategies play an important role in this process as they help minimize the impact of price fluctuations, preserve capital, and maintain account stability. This allows traders to achieve their profit targets while still controlling their overall risk.
Account types: Demo account and live account
Account types in proprietary trading firms are usually divided into demo and live accounts, each with its own risk management rules. In the demo phase, traders can be more flexible in applying strategies, but when moving to a live account, all rules are strictly controlled. Since prop firms use hedging strategies to ensure capital safety, any deviation in hedging behavior in a live account can lead to violations and loss of all profits.
EA application, stop loss setting and trading tools
Proprietary trading firms often allow the use of Expert Advisors (EAs), setting Stop Loss orders, and operating on advanced trading platforms. However, EAs must comply with the rules and must not exploit system errors. MT5 is the most popular platform because it supports both netting and hedging modes, allowing for flexible execution of strategies. Although not always required, the use of stop-loss orders is still recommended to ensure compliance with risk management procedures and effective account protection when participating in prop firms using hedging strategies.
How proprietary trading firms use hedging?
How proprietary trading firms use hedging?
Prop firms use hedging strategies to limit risks for traders through the application of advanced technology, automated risk management systems and in-depth market analysis algorithms. This helps maintain stable profits and protect capital more effectively.
Risk management process: To implement an effective hedging strategy, proprietary trading companies often set up a strict risk management system, helping to identify and control losses from the early stages. Each position is monitored by automated analysis tools to limit losses to an optimal level. In addition, the risk management team continuously updates market data and adjusts the hedging strategy to suit actual fluctuations, ensuring stable and safe trading performance for the fund.
Leveraging technology and artificial intelligence (AI): In addition to applying rigorous risk management processes, prop firms use hedging strategies combined with artificial intelligence (AI) to optimize hedging positions. AI technology helps monitor portfolios in real time, identify correlations between assets, and automatically adjust positions when the market changes suddenly. As a result, proprietary trading firms can maintain stable performance and improve the accuracy of hedging strategy implementation.
Intensive training in risk management and hedging strategies: In addition to applying technology, proprietary trading firms focus on training traders on how to use hedging strategies at the right time. Traders are trained in risk assessment skills, recognizing market signals and determining when to open or close orders. In addition, they are also guided in analyzing statistical data and applying technical indicators to optimize trading efficiency and protect accounts from price fluctuations.
Track the correlation ratio between assets: A key factor that helps prop firms use hedging strategies effectively is the ability to track correlations between assets. Proprietary trading firms often use specialized software to analyze correlations and cross-influences between currency pairs, indices, or commodities. This data helps them adjust hedging positions accordingly, optimize portfolios against volatility, and maintain stable profits over the long term.
Top prop firms that allow hedging strategies
If you want to partner with a prop firm capable of effective risk management, consider the following companies that allow the use of hedging strategies, helping protect capital and optimize profits during trading.
FTMO
FTMO is among the prop firms that use hedging strategies, supporting traders in implementing risk management techniques to protect their positions. The company applies a clear two-step evaluation process and offers an attractive profit-sharing rate of up to 90%, enabling traders to maximize profits while maintaining effective risk control.
The5ers
The5ers allows traders to apply hedging strategies on both short-term and long-term accounts. Traders are not limited by time to achieve profit targets and can enjoy a profit-sharing rate of up to 95% when scaling, optimizing benefits from efficient and secure trading.
My Forex Funds
My Forex Funds supports qualified traders in implementing hedging strategies to protect their capital. The firm offers both one-step and two-step evaluation models to thoroughly assess trading skills. Additionally, it provides an attractive profit-sharing structure of up to 90%, encouraging traders to maximize profits while managing risk effectively.
Blue Guardian
Blue Guardian provides traders with full hedging capabilities to safeguard capital efficiently. This prop firm applies flexible trading rules, allowing traders to adjust strategies as needed. Its competitive evaluation model is open and unrestricted, giving traders the freedom to optimize long-term performance.
E8 Funding
E8 Funding enables traders to apply hedging strategies effectively on both MT4 and MT5 platforms, protecting positions and minimizing trading risks. The firm offers comprehensive tools to manage current accounts, allowing flexible position adjustments. Its attractive profit-sharing structure, typically ranging from 85% to 90%, motivates traders to maximize profits while keeping capital safe.
Effective trading experience in prop firm using hedging strategies
Effective trading experience in prop firm using hedging strategies
When participating prop firms use hedging strategies, traders who want to achieve success should note the following tips:
Learn about hedging: When choosing to join prop firms that use hedging strategies, you need to understand the company’s operating mechanism and direction. First, take a detailed look at the regulations on risk control, trading limits, and how they allow hedging. Some prop firms allow traders to hedge directly, while others only implement it at the portfolio management level. Understanding this rule will help you comply properly and maximize the effectiveness of your trading strategy.
Improve your professional knowledge: Traders should focus on improving their knowledge of capital management and market analysis. Hedging is not simply opening two opposing orders, but the process of calculating and adjusting positions based on the relationship between financial instruments. Traders must know the right time to apply risk prevention or keep the position unchanged to maintain optimal profit performance.
Choose a reputable proprietary trading company: Prioritize choosing prop firms with high reputation, transparency in transaction management and modern technology systems. In addition to providing capital, reliable proprietary trading companies also provide systematic training programs, supporting traders to practice skills towards long-term development.
Stick to your strategy: Consider hedging as a strategic support tool, not an “absolute shield”. Maintaining a stable mentality, strictly following your trading plan and constantly improving your knowledge will be key factors to help you achieve stable results and success when participating in any prop firms using hedging strategies.
Conclude
Prop firms use hedging strategies to optimize risk management and protect investment capital. Proper application helps traders balance positions, take advantage of market opportunities while controlling losses. Understanding the mechanism, complying with regulations and combining analytical skills will be the key to traders’ long-term effectiveness when trading in a proprietary trading environment.
