The traders always practise forex Hedging to safeguard themselves from the uncertain price movements that periodically occur in the currency market. The institutions and traders deliberately use it for reducing the potential losses. Traders typically go for hedging when they are afraid of some random market movement due to some uneven news which can affect the price movement of the currency pairs.
For example, if the traders have chosen the long term position and suddenly the market starts moving downtrend, then hedging can reduce the risk of potential losses. Therefore hedging is also known as the type short term protection technique for safeguarding the positions of the traders when it requires.
There are several Forex hedging strategies which are used by the forex traders. But traders should understand that hedging can only use for reducing the risk not for making profits. If you want to know the profitable forex trading strategies, you can read our article https://fxreviews.best/blog/9-amazing-currency-trading-strategies-for-every-aspiring-forex-trader/
Below, we will dive deep into the detailed forex hedging strategies which are best and popular.
Best Forex Hedging Strategies
1. Direct Forex Hedging Strategies
Direct hedging is also known as the simple hedging strategy, and it is one of the most popularly used forex hedging strategies. In this strategy, traders open the two different position at the same time on the same currency pairs. Such as trader open the long position on AUD/USD and at the same time it opens the short positions and places the sale order for currency pair. Due to this, traders can ensure that if the one position is in the loss, it can offset it by the other position.
2. Options Forex Hedging Strategies
This strategy involves the practice of buying and selling the currency pair at a fixed price on a specific date into the future. Traders who are not interested in trading the multiple currencies they use the options forex hedging strategy.
For example, if the trader believes and decides to open the AUD/JPY long position at the 1.25, and if the AUD rises against the JPY such as 1.27, then they might gain the profit. But if AUD collapse due to sudden price movement, then the traders can execute the options strategy and close the position at the 1.24 so that they can reduce the potential loss.
3. Multiple Forex Pair Forex Hedging Strategy
The other perfect forex hedging strategy is hedging with correlated currency pairs. Traders use the positively and negatively correlated currency pairs for hedging the risk. For example, USD/EUR and USD/JPY are negatively correlated, while the GBP/USD and GBP/JPY are positively correlated. There are many currency pairs which are correlated up to 90%. Therefore most of the time they move 90% in the same direction. Traders can open a long position on GBP/USD and short position on the GBP/JPY as they move in the same direction; therefore, traders can compensate for the loss from the other position.
Some Tips for Implementing the Forex Hedging Strategy
- Forex hedging needs an experience and thorough understanding of the market and the different strategies, therefore, it is not recommended to beginners.
- It is better to use the automatic execution method while using the forex hedging. Therefore traders should understand about the automation before using the forex hedging strategy.
- Hedging is executed correctly only on the specific timings. If the price movements are limited or the market is moving the sideways, then the hedging will work effectively. Therefore traders should always look for the perfect timing while using the forex hedging.
- Traders should always keep in mind that they will have to pay the commission from their profits; therefore, traders should always try to gain adequate profits.
- Traders should keep the patience and wait for the perfect timing; they should not push too much.
- Forex Hedging is not allowed by every broker; therefore, traders should select the right brokers which allow the hedging. Here are some top forex brokers which are safe and which allows the forex hedging. ETFinance and Tradedwell are best forex brokers which are regulated and authorised by the top financial bodies. They offer low commission and spread.
Why is Forex Hedging important?
As we mentioned above, forex hedging is not for gaining the high profits it is used as the protection from the high risk of the forex market as risk management is an integral part of forex trading.
Many professional traders use different methods to protect their position. It is useful for protecting the long term trades from the provisional decrease against their positions. And at the same time diluting the potential loss to a lesser amount.
Therefore hedging is considered as the better alternative option for the stop-loss if the traders have a strong belief in the market movements then the hedging is best in the forex market.
Forex Hedging Commission
A. There is no fixed commission on it. Different brokers charge different commissions.
B. Most brokers charge the commission or the part of the spread of the market in which the traders are trading.
C. Traders should have the perfect trading plan and understanding about the currencies and the market because excessive trading and its commission can dilute the whole profits of the traders.
- It requires thorough practice, patience and understanding of the market. Hedging can attract heavy commission if not used properly.
- No hedging strategy can ultimately dilute your risk; you should have to use them accurately on the perfect timing.
- Different techniques are required in different market condition. It is commonly used based on any events or news that will fluctuate the currency prices.
- Hedging is not used directly for making the profits while its use to reduce the potential loss at a certain level, and that will convert your somewhere into the profit.
- Therefore if you are the beginners, then you should understand the techniques correctly and should have the account with the right broker.
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