What is Hedging in Forex?

Trading | 4 months ago


What is Hedging in Forex? - tradeglobalmarket

Many traders do not know the most successful recipe of profitable trading. Even if some know, they do not Practice it. In order to be profitable in forex trading, all you have to do is limit your losses, Profit will take care of itself. So, the question is how to limit your losses? The answer is hedging.

What is Hedging?

In simple terms, hedging is an insurance on your trade. When you hedge a position, you protect yourself against a big loss in advanced.

Is hedging legal?

Absolutely yes, it is a legal tool for forex trading risk insurance. However, there may be some restrictions depending on the broker you choose.

How does hedging work in the Forex market?

There are two types of hedging. One is the direct hedge and second is indirect hedge. Traders use these two methods based on the market conditions and their convenience.

What is Direct Hedging?

In direct hedging, you can place both buy and sell order on the same currency pairs. For instance, let's say you have a bullish view on GBP/USD pair. You placed a buy order. But after sometimes you noticed that you were wrong. The pair is going down. So, to protect yourself from a loss you can place a sell order on the GBP/USD pair. In this scenario your losses will be minimal.

What is Indirect Hedging?

Hedging a position using correlated currency pairs Is known as indirect hedging. This involves opening two identical positions on currency pairs with a negative correlation. This is a slightly complex way of hedging. One must practice it in the demo environment before applying in the real market.

What are the advantages of forex hedging?

Hedging allows traders to reduce the risks and protects their investments. If mastered properly, hedging also allows traders to make consistent profit.

What are the disadvantages of forex hedging?

Hedging requires large amount of funds as compared to simple trading with stop loss. If market gets trapped in a range bound, then your trading funds may freeze for a considerable amount of time.


 

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