Protecting Yourself through FX Hedging

Protecting Yourself through FX Hedging

We’ve all heard the idiom, “to hedge your bet.”  It has several meanings, but the two that are most appropriate when applying them to forex trading are these:  to protect oneself against choosing incorrectly and to leave open a means of retreat.  Horror stories about forex trades gone stunningly bad are not uncommon.  Not surprisingly, many horror stories are borne of traders who rely on a single huge forex trade, a trade which went horribly wrong. 

How FX Hedging Works

FX hedging is one way to avoid a huge loss from making the wrong choice.  Applying FX hedging to your forex trading strategy may appear a bit tricky, but that’s no reason to dismiss it.  It is a means of minimizing your exposure to risk by opening up more than one trade, which may offset the outcome of the original trade.  The FX hedging process doesn’t typically generate huge quick profits but rather, slow and steady gains. 

Briefly, FX hedging requires the forex trader to open two or more related trades.  For example, say you’re buying the EUR/USD cross, you might want to also buy into USD/JPY; this way, if the USD appreciates, your EUR/USD trade would be afforded some protection simply because you’d profit from the USD/JPY rising. 

More Pros/Cons of FX Hedging

FX hedging has another benefit, because by spreading your exposure you lessen your risk of a margin call which might occur if your equity can’t support your single open position.  Of course, FX hedging can get very complicated, very quickly, especially if a trader opens up a 3rd trade to offset the 2nd which is hedging the 1st.   But, in utilizing the FX hedging concept, even if one trade goes wrong (in theory) your other trade shouldn’t. 

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