Forex Hedging and its Strategies to neutralize losses

by Forex Camping Online forex training and tutorials.

We all know that Forex market is explosive in nature and investment made here are exposed to some level of risk. So to save themselves from unexpected occurrences, traders practise Forex hedging. Basically, it is a strategy used by many traders to reduce the risk which is involved in this market. Most of the beginners in the FX market are unaware of this technology and experts of the market use this technique regularly to reduce the risk. The word “hedging” actually came from gambling ♠ in which the players try to reduce their risk of losing, same principle used in Forex. Traders prepare themselves for any unpredictable event which can cause them huge financial loss.

How does Hedging work?
Hedging is like buying an insurance policy for a car. In this case, insurance policy reduces the cost to be borne by you in case of any mishap, but you are not fully covered. Same with hedging it covers you to some extent but cannot protect you completely. Hedging covers the long and short position of currency in case of any downside or upside risk. For example if you have Canadian / NZ dollar pair open, long, with 5 standard lots, open 5 standard lots, Short, with the Canadian / NZ dollar. Here they both will move equally, which in the end counterbalance you losses. Even, you are safe from margin calls if short and long positions done with same broker.

Hedging strategies
There are numbers of strategies used by the traders. The most popular strategy is the usage of derivatives. The derivatives used in the FX market are also known as Future contracts. This type of contract is very much similar to normal contract and the only difference is that currency is traded instead of stock and the agreement is signed to buy or sell currency at a specific price on a particular date. This is a proven strategy against the fluctuations in currency.
Another well known method against fluctuation is to trade in multiple pairs, i.e. traders can hold two pairs and can easily compensate the losses. In this the long and short positions occurs at the same time as a result proved as a good hedging technique.

Hedging requires Money
Always remember the market moves so quickly and the movement in price can reach up to less than 1 percent which not at all gives you handsome profit unless or until you have a good capital to invest. So keep in mind that hedging can be beneficial for you only, either you have got an enough experience to survive or you have large capital to invest.

Hedging never guarantee profits
Even though hedging is proven way to neutralize the losses but still you cannot eradicate the possibility of losses completely. So be careful while using hedging technique and over check what you are doing.