Hedging is a risk management strategy that allows you to insure one investment by making another.
In CFD trading, hedging is possible when you open both long and short positions simultaneously to offset the risk of price movements.
Hedging can be compared to insurance – for example, against natural disasters. You can't prevent or control nature, but you can minimize your losses by buying insurance.
In trading, the market is unpredictable, and you can be exposed to unfavorable market movements. If you don’t want to close your position, you can use a hedging strategy and open another position that you believe will counterbalance the existing one.
For example, say you trade BTC/USD with 1:10 leverage. You want to open a long/buy position for 1 BTC. To do so, you will need 0.1 BTC of your own funds, because the leverage is 1:10.
You realize that the market is highly volatile and the price may go down.
So you open a short/sell position, for example for 0.1 BTC. To open such a position, you must pay the price of the spread value, or the difference between the ask and bid price.
So you have two open positions in opposite directions (buy and sell) simultaneously.
By using such a hedging strategy, you minimize your possible losses if the market price changes.