Hedging
Hedging is opening a position to offset the risk of another — insurance arranged inside the account rather than bought from an insurer.
The direct form is an equal and opposite position in the same instrument, which freezes the combined P&L wherever it stands. The indirect form uses a correlated instrument — offsetting an index long with a short in a related index, for example — which offsets only as well as the correlation holds. Institutions hedge to neutralize exposures they must carry; retail hedging is more often a reaction to a losing trade that the trader cannot bring himself to close.
That is the catch: a locked hedge does not repair a loss, it preserves it — while both legs keep paying spread and swap, and closing either side reopens the original question. In most retail situations a plain stop-loss produces the same worst case with one position and no carrying cost.
Example
You are long 1 standard lot of EURUSD from 1.0900; price sits at 1.0850, so floating P&L is −$500. Opening a 1-lot short at 1.0850 locks the net at about −$500 no matter where price goes next. Nothing is resolved — the −$500 is still there, both legs accrue overnight fees, and exiting profitably still requires the directional decision the hedge postponed, now with two spreads paid.
In a prop-firm challenge
Read the rulebook before hedging anything. Many platforms net opposite positions in one instrument rather than holding both, and several firms restrict intra-account hedging outright. The hard line is hedging across accounts — long in one challenge and short in another so that one is guaranteed to pass — which firms treat as a prohibited scheme that voids accounts and fees rather than a strategy. The reasoning behind these clauses is covered in prop firm rules explained.