Forex Hedging Strategy Protection Against Loss

You can offset your currency risks through hedging in the forex currency pairs. It helps you to minimise the impact of price movements on your trades. You can easily decide when to open or close a position by maintaining your investment portfolio through hedging. It is one of the best ways to protect your funds from significant losses.

There are many hedging strategies that you can follow to protect your funds in order to manage your trades to gain maximum from them. In addition, hedging gives a helping hand to your position to not be affected when the market goes in the negative direction. So you may hedge against the potential losses without any risks by following the strategies we will discuss.

What is Forex Hedging?

Forex hedging refers to the process of minimising losses by opening the opposite position in the same forex currency pair. It will protect your existing position in unfavourable conditions by holding both a short and a long position at the same time. It is also known as the perfect hedge.

The foreign exchange market is the largest marketplace in the world, where more than $4 trillion is traded daily. So the forex currency pairs are subjected to high volatility and exposed to a large pool of risks, but you can manage these risks by taking a crucial step in your currency trading journey. This crucial step is hedging.

Hedge only against the position where required. Some traders commit the common mistake of overhedging which results in significant losses. It may look terrible to your investment portfolio.

So here are the top strategies of forex hedging against loss.

Forex Hedging Strategies

Perfect hedging

This strategy completely eliminates the potential losses and potential profits as well. So while the hedge is active, all the risks and potential gains associated with the trade become zero. This is called perfect hedging in the world of trading. The net profit or loss in such a strategy is zero.

You can manage your position in this strategy by making your trade non-vulnerable in a particular period. Now when you realise that the forex market is moving in your favour, you can close the hedge and expose your position to the market to absorb both profits and risks.

But you may not have access to perfect hedge on all the trading platforms as it cancels both profit and loss. So basically, it completely shuts off the probability of gains and losses from that particular position.

Correlation hedging

This is a common hedging strategy among many traders. Most brokers and trading platforms allow this kind of hedging for their clients. This strategy tells about the correlation between the currency pairs. Correlation hedging is the process of opening an opposite position on two currencies that are moving in the same direction.

This means you have to identify those currencies that have a positive correlation between them. Now understand this with an example, let’s say we have two popular currency pairs, and both are moving in the same direction. So if you had a long position on one currency pair, you might hedge it with a short position on the currency pair.

Hedging with CFDs

Most forex traders use CFDs (Contracts For Difference) to hedge against their potential losses. You can speculate on downtrends with CFDs as they are contracts between buyers and sellers. Thus, you can trade on any currency pair without owing it and hedge for the protection of your trades.

You can place a short-term hedge with CFDs on a long position rather than squaring off your trade.

Hedging with options

Forex options are the form of contracts that give you the right but not the obligation to buy or sell the currency at a strike price on a predefined date. For example, you can hedge using call and put options against your negative position. Call options give you the right but not an obligation to buy a currency, and put options give you the right but not an obligation to sell a currency.

Hedging with options is also one of the most popular ways to protect your capital and trade.

Bottom Line

Hedging is a good option for the protection of your losses but be aware of the rules and strategies that need to be followed accurately. You have to find a reliable broker that allows hedging for the purpose of saving your trades.Brokereo is one of the well-regulated brokers that allows hedging for their clients. The broker is known for allowing hedging in all its account tiers.