NOTE: In NeuroShell Trader, open the chart named “Example 22 – Hedged Portfolio” which is the basis for following example:
It only took a slight adjustment to turn Example 19 into a nicely hedged system. At all times it is long one stock and short one stock. Since the strategy always invests $10,000 in each stock, the hedge is maintained on a dollar basis too, which would not have happened if we were always buying and selling a fixed number of shares. All we did was adjust the rules so that an exit occurs as soon as the rank drops below one. We called that strategy Hedge1 because there is always one long and one short.
Then we build Hedge2, which always has two stocks long and two short.
Obviously the best use of such a hedging strategy would be to pick a portfolio of stocks in the same sector, say, so that they are likely to move together when news hits.