What is Hedging in Forex?

Hedging is a form of strategy that strives to minimize your risk whilst trading and protect you against unwanted price changes. Traders usually close or reduce positions when wanting to avoid risky trading situations, but there are many opportunities where you want to minimize your exposure only for a short while. Depending on the problem you are in, you are to decide whether Hedging might prove more convenient than closing out completely.

Is it possible to do that?

Finding a pair that you think you can work with and get good results. It is possible to take a position that is market neutral most of the time, even if there is a currency pair that is strongly connected with another.

A great example would be having a long position in GBP/USD. Buying a USD/CAD pair would serve to “hedge” most of your exposure since the USD/CAD has a negative relationship compared to GBP/USD.

Bear in mind this cannot provide a complete hedge if you deal in the same size in both pairs. What is the trick then? A combination of correlated positions has a role in offsetting risks – that’s how hedge funds got their name in the first place. This takes a lot of research and experimenting with making a market-neutral trading strategy virtually, so you can always try first with a demo trading account without putting your money on the line, but continuing to gather valuable information.

Is there software for Hedging?

You’re probably already familiar with various trading software, and Hedging is no exception to them. It can make a trader’s life a lot easier, and it can be beneficial if we consider the time factor. A trading software set up to focus on Hedging can research for you a lot quicker. Hence you won’t need to spend hours figuring out what would be the best and the safest option.

How does a Forex Hedging Robot Work?

The basics on which a forex hedging robot works is the idea where you open many positions while buying and selling them at the same time while implementing trend analysis. This way, although Forex is prone to sudden changes, depending on what’s happening in the world, you are still trying to create the most “positive” place in the market. This means having the one that is almost entirely risk-free, where you shouldn’t worry about unexpected situations. Still, you need to follow FIFO (first in, first out) rules if you are using a hedging forex robot. This leads us deeper to a more profound question which is:

Is Hedging Legal?

This is a tricky question, but we have an answer for traders who are interested in this trading strategy. First thing, Hedging is illegal in the United States, but not EVERY form of it. Therefore, there are restrictions that CFTC made for Forex traders to manage the law of buying and selling correctly. In other places such as Europe, Asia, or Australia, Forex hedging is a legal activity, and you can use a Forex hedging robot or whatever else to implement this to your trading activities.

The important thing to keep in mind

You are striving to avoid risk with Hedging, but it doesn’t come for free. There are still transaction fees, and Hedging itself can cost you some money. Also, the risk can be lessened on the market, but if the market itself moves against your favour. If you are hedging, if the market is moving in your favour, you will make less money than you would without Hedging. This shows you that Hedging isn’t a universal solution for traders – if it was to be like that no one would ever be in a risky position or even lose. It’s merely another way of limiting your losses if you invested a lot of money into the market.

Experienced traders will know that closing a position or reducing it isn’t the end of the world. Hedging can come in hand, but consider how you traded by now. How much of a risk-taker you are, and are you at all? What do you want to achieve by searching and learning about Hedging? What prompted you to look at it?

In conclusion

If you are interested in trying out Hedging, talking with a broker would be a good thing to do. Hedging means you will have to reconsider your goals, and with it comes a change in your trading plan. Trading plans are indeed prone to change, but this is something you should think through entirely and see if you are the type of Forex trader that is suitable for that type of trading. Do you have enough patience even if everything seems more manageable with Hedging? Is it legal (check once again)? See if maybe there is a better way for you to manage your risk. Perhaps you are in a situation where you are not sure what’s your next step, so take some time to reevaluate your money management moves, and stay in touch with experienced people. Decide after that whether you want to dive into Hedging or leave for some other time.