Hedging Strategy in Forex Trading

Hedging Strategy in Forex Trading - Hedging strategies are only used to protect yourself from heavy losses, to get insurance for your trading. Hedging is a way to reduce the amount of loss that you will experience if something unexpected happens.

Simple Hedging Strategy

Some brokers allow you to place trades which are direct hedging. Direct hedging is when you are allowed to place a trade that buys a currency pair and then at the same time you can trade to sell the same pair. While net income is zero while you have both open trading, you can make more money without incurring additional risk if you are at the right market time.

The simple way of forex hedging protects you is to allow you to trade the opposite direction of your initial trading without having to close the initial trade. It can be said that it makes more sense to close the initial trade for losses and place new trades in a better place. This is part of the wisdom of the trader.

As a trader, you can of course close your initial trading and enter the market at a better price. The advantage of using hedging is that you can maintain your trading in the market and make money with the second trading that makes a profit when the market moves against your first position. When you suspect the market will reverse and return to your initial trading, you can stop trading hedging, or close it.

Complex Hedging Strategy

There are many methods for complex hedging from forex trading. Many brokers do not allow traders to take hedging positions directly on the same account so another approach is needed.

Many Currency Pairs

A forex trader can make hedging against a particular currency by using two different currency pairs. For example, you can make short EUR / USD and USD / CHF purchases. In this case, it won't be right, but you will limit your USD exposure. The only problem with hedging in this way is that you get fluctuations in Euro (EUR) and Switzerland (CHF).

This means that if the Euro becomes a strong currency against all other currencies, there may be fluctuations in EUR / USD that are not neutralized in USD / CHF. This is generally not a reliable way to hedge unless you are building a complicated hedging that considers many currency pairs.

Forex Options

Forex option is an agreement to exchange at a price determined in the future. For example, let's say you place a long trade in EUR / USD at 1.30. To protect that position, you place a forex strike option at 1.29.

What this means is if EUR / USD falls to 1.29 in the time specified for your option, you are paid for that option. How much you get paid depends on market conditions when you buy options and size options. If the EUR / USD does not reach that price within the allotted time, you only lose the option purchase price. The farther away from the market price of your choice at the time of purchase, the greater the payment will be if the price is hit within the specified time.

Reasons for Hedging Strategies

The main reason you want to use hedging on your trading is to limit risk. Hedging can be a bigger part of your trading plan if done carefully. This should only be used by experienced traders who understand changes and market times. Playing with hedging without an adequate trading experience can be a disaster for your account.

Also read:
- The Simplest Trading Strategies for Beginners
- Simple Forex Strategy using Support Resistance
- Basic Forex Trading Techniques for Beginners 

These are tips that I can share about Hedging Strategy in Forex Trading. Hopefully it can be useful for you and good luck.