A rule governing whether a trader can hold simultaneous long and short positions in the same or correlated instruments. Some prop firms prohibit hedging entirely, while others allow it with restrictions.
Why It Matters
- 1Hedging in a prop firm evaluation can be used to lock in profits or manage risk during volatile periods.
- 2However, firms often restrict it because hedged positions can be used to manipulate drawdown calculations or exploit rule loopholes.
- 3If your strategy involves hedging — such as being long ES and short NQ — you need to verify whether the firm allows it. Violating hedging rules can result in immediate account termination even if you're profitable.
Example
- 1You're long 3 ES contracts at 4,500 and the market starts falling.
- 2Instead of closing, you short 2 ES contracts at 4,490 to partially hedge.
- 3You're now net long 1 contract.
- 4If your firm prohibits hedging, both the long and short positions are considered a violation, regardless of your intent to manage risk.
Common Mistakes
- ✖Assuming hedging is allowed because it's a legitimate risk management technique
- ✖Not realizing that hedging across correlated instruments (e.g., ES and NQ) may also be restricted
- ✖Using hedging to avoid closing a losing trade, which just delays the inevitable