ABSTRACT
This chapter discusses hedging and its functions, with attention focused upon a "technical analysis" method that can be used to aid in making hedging decisions. The basic assumption of technical analysis is that useful predictions of future market prices can be deduced by studying the statistics and chart patterns generated by the market. A moving-average price is a progressive average in which the number of prices averaged remains the same but new price is added to the front of the series at periodic intervals as an old price is dropped from the end of the series. One modification follows a "penetration rule," which requires the moving averages to cross by at least a certain amount before the crossing action is perceived as a valid buy or sell signal. Observation and testing of blind-hedging programs typically indicated that although they stabilized profits, they also lowered average profits. The moving-average procedure functions mechanically to indicate hedges, then to place and lift hedges.
