Forex hedging is a technique in which you place two orders that are to be executed at the same time. One is the order connected with the buying of a currency pair and the other relates to the selling of the same currency pair. Direct hedging is mostly used to negate the two orders as the trader normally tends to cancel the profit with the loss keeping the trade options still open on both ends. After that, the trader can wait for the market to move in his preferred direction to take a second chance on both trades.
As it is always hard to make a quick decision in the forex market, you need to be armed with the hedging techniques to clutch reasonable returns from the forex market without putting a huge dent into your savings.
To be more accurate, you would be involved in selling and buying different types of currency pairs to bulletproof yourself from the fluctuating exchange rates. Remember that the hedging would not fully cover your losses in case of negative events in the market but it would certainly protect you to a reasonable extent. It is just like when you insure your car and it won’t give you full protection but reasonable protection after an unfortunate roadside accident.
Among tons and tons of proven winning strategies in the forex market, you cannot discount the importance of the use of derivatives in forex hedging. The use of derivatives is an alternate name for the futures contract. This is a special type of contract in which you opt for selling or buying a specific currency on a future agreed date. This strategy has gained enormous popularity among forex traders all around the globe.
The forex traders are also very fond of using multiple currency pairs strategy in which they normally go for holding two different currency pairs. For example, you can go for holding a specific currency pair such as euros-to-rand or euros-to-dollar. If the trader finds difficult times in one currency pair, he can easily switch to selling the other currency pair. This is also a worldwide proven strategy in the forex world to minimize losses.
There is also an open secret of utilizing the services of multiple forex traders simultaneously in forex hedging. In this scenario, you would register yourself in multiple traders i.e. one charging heavy-duty interest rates and the other one who doesn’t charge any interest rate at all. Thus you can easily book your profits from both traders by selling off your currency in good times and you can also minimize your losses by paying interest charges to only one broker in bad times.
I would also recommend getting a professional’s advice before diving into this venture as a novice trader. The reason is that it is always confusing for a novice player to place his bets in both market directions simultaneously. However professional connoisseurs can perfectly give a piece of advice against a potentially negative event in the forex market.
You have to opt for a dual protective strategy i.e. to maximize gains during profit times and to minimize loss during negative times. For example, if you are investing in this yo-yo type of market then you have to be very choosy in timings related to buying and selling of currency pairs. Only experience trader is able to take quick entry and exit point decisions.
Forex hedging strategy
There are multifarious winning strategies involved in hedging and one of the best among them is recognized as hedging with correlated pairs. In other words, it is a proven winning technique in which the forex trader is involved in trading those currencies that have a solid connection. To get the real-time knack of the connection between different currency Pairs, you can analyze their past movement graphs.
You can formulate your own winning strategy after taking a close look at the similarities in different currency pairs. Once again, a professional connoisseur would rightly feed your decision-making by injecting his past experience between different currency pairs.
For example, if you opt for two currency pairs that go inversely against each other, then in bad times, you can execute both orders to cancel the profits and losses giving you a fine exit in negative market times.
The hedging is literally imperative in volatile markets as it doesn’t force you to take a quick decision right away as in normal forex transactions. You can opt for the wait-and-watch strategy to give ample room to the market to move in your preferred direction.
Hedging gives you better chances to end off better in bad market times. In order to make hedging worth your while, you should sit around with some professional hedgers to investigate forex historical data related to hedging. Time’s primary motive for hedging is not only to make profits but to minimize losses in negative market times.