What is hedging?
Hedging means opening two opposite positions on the same instrument at once. Allowed within a single account by most prop firms, it is almost always prohibited across several accounts.
The rule is more nuanced than a plain yes or no, and the nuance decides whether your gains stand.
Internal hedging
Opening a long and a short position on the same instrument, within the same account, is allowed by most firms. Net exposure is nil, and so is the risk to the company.
Whether the manoeuvre is genuinely useful is debatable — two opposite positions cost two spreads for a frozen net result — but it is sometimes used to neutralise an exposure temporarily without closing it.
Hedging across accounts
This is where the prohibition becomes near-universal, and severe.
The technique is to open the long on one account and the short on another. Whichever way the market moves, one of the two accounts wins. The trader then passes the winning account and abandons the losing one, having lost only its fee.
From the firm’s point of view this is not trading but the exploitation of an asymmetry: losses are capped at the price of the challenge, gains are not. Every firm prohibits it, including across accounts opened at different companies — a clause they cannot really enforce, but which is enough for them to cancel a payout if they detect it.
Detection
Firms compare timestamps, position sizes and instruments across accounts tied to the same identity or the same IP address. They also sometimes share information with each other.
What remains permitted
Hedging a position with a correlated but distinct instrument — selling an index to cover a basket of stocks, for instance — is a legitimate strategy and is generally not targeted. The line is drawn on intent: neutralising a risk, or exploiting the evaluation mechanism.
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Related terms
- Breach A breach is the violation of a risk rule that triggers a sanction on the account. Depending on the firm and the rule involved, it suspends the trading day, cancels a payout, or closes the account for good.
- Challenge A challenge is the paid evaluation a prop firm sells. The trader must reach a profit target without crossing the imposed loss limits, on a simulated account. Passing it gives access to a funded account.
- Copy trading Copy trading means replicating another account's positions. Prop firms prohibit or restrict it almost systematically, including between several accounts held by the same trader.
- Equity Equity is the value of a trading account with open positions included, unlike balance which counts only closed trades. Most prop firms calculate their risk limits on equity.