Hedging is an effective way of offsetting your risk while trading in the forex market. The forex is known for the price fluctuation that often puts the trader’s money at risk. Therefore, every smart forex trader must know about hedging to cut out the risk of forex trading. Moreover, for hedging, you need a reputable broking firm that can help you. So, always read ForexTime broker review (รีวิว โบรกเกอร์ ForexTime, which is the term in Thai) before choosing any brokers.
Here is how to hedging (สอน hedging, term in Thai) your position and save yourself from making hefty losses while trading.
Why Hedge Forex?
Knowing how to hedging positions gives you protection against price volatility. However, the forex hedging is a bit different than another market. The forex is the more volatile, which makes hedging position typical than equity and commodities market.
Therefore, the strategies that you can use will be different too. Here are few strategies that you can use to hedge your position in the Forex market.
Direct Hedging Or Simple Hedging
Suppose, you choose to take a long position on a currency pair that you seem fit for trading. In direct hedging, what you do to hedge such a long position, you take a short position on the same currency pair. You do realize that direct hedging in turn results in zero loss, whenever there is a market reversal from your position.
However, not using the direct hedge will mean suffering loss. So, it better to use a direct hedge than take a heavy loss due to market reversal. Also, not all the broker allow you to direct hedge in the forex market. So, read the ForexTime broker review, and choose the best broker to start hedging.
Hedging Multiple Currencies
However, to perform multiple hedging, you need a good knowledge of the forex market. The multiple currencies hedging strategy asks you to first find currency pairs that are positively correlated.
To make you understand what we mean, let us suppose the GBP/USD and EUR/USD are the positively correlated currency pairs. To hedge your position you need to take the opposite position on both currency pairs. Here is how things will turn out. Let us say, you take a long-short position of EUR/USD. For hedging, you take the opposite position (which is the Long position) on the positively correlated pair that GBP/USD. IF EUR fails against USD, your hedge position will incur the loss. Similarly, if USD fails the hedge will handle the loss of your short position.