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Hedging is a crucial aspect of forex trading, yet it is one that many traders fail to utilise. Using hedging can improve returns and offer protection from potential losses if the market moves against your position.
Hedging is an investment strategy that can reduce risk by matching a long position with a short position in the same assets. It involves simultaneously opening opposite positions that cancel one another out to reduce or eliminate any financial loss if prices move contrary to expectations.
Using hedging successfully is all about managing your risks effectively. By doing so, with proper risk management, you can put yourself into a better position financially and be more profitable in your trading journey.
This trading method might not be for everyone, but it is worth considering, especially if you struggle with knowing when or how much to trade with. This way, even if you make a terrible decision, there isn’t too much damage done because at least one of your trades is closed successfully.
CFDs and spread betting
Hedging has become increasingly popular over recent years, and we have seen many different hedging techniques come and go during this time. For example, traders will often use CFDs and spread betting to hedge the risk on their forex trades, and we have seen similar hedges arise across different asset classes such as oil and stocks.
Using a CFD or spread betting account is one of the most flexible ways to take advantage of hedging opportunities, so if you think this might be something for you, then open an account today to get started.
Hedging tools
For many traders who do not have sophisticated hedging strategies or stop-losses in place, there is no way for them to reduce their maximum loss potential when they are staring down a losing trade. However, forex brokers now often offer hedging tools that allow traders to reduce their risk during these periods of high volatility. This means that traders can increase their position size while simultaneously reducing their maximum loss potential.
The most popular hedging tool used among retail forex traders is a mini lot, which consists of 10,000 units of the base currency. This means that if you have $500 in your account and want to hedge on a $40,000 trade, you would buy 50 mini lots (or five total standard lots).
This hedging technique allows traders to insure their losses against any catastrophic moves that entirely wipe out their trading accounts. However, while hedging does reduce some of the risks during periods of volatility, it doesn’t equalise the risk across all trades. Hedging is not designed to eliminate all risks; instead, it minimises them so that overall risk remains manageable throughout the entire trading process.
Hedging strategies
Hedging strategies can be used for almost anything related to forex trading, but a few specific strategies are mentioned a lot.
Scaling
The first is scaling out of an existing position to reduce the average price paid. This means that when you have two positions open, you can sell half from the losing trade and repurchase it once the position has turned around in your favour.
Hedging trades together
The second strategy involves hedging trades together to protect capital against big moves in the market. In other words, if you have five mini lots open and one goes wrong while the other four go good, then this hedging method allows traders to even out their gains and losses across all positions. This way, the risk is limited because every trade works together instead of acting independently.
Bottom Line
With such lucrative prospects, it’s not surprising that interest in forex trading has exploded over recent years. Indeed, many forex brokers have sprung up on the scene to facilitate this type of trading. This new breed of a broker like Saxo Bank promises easy access to some of the world’s largest exchanges through a single account with a platform that is simple to use.
