Forex Hedging Secrets

The Forex market can be a very lucrative way to make money, if you know what you’re doing. One of the ways you can minimize your risk in the Forex market is to hedge. Forex hedging strategies can be very useful as a means to “buy yourself insurance” so as to minimize losses.

How does Forex Hedging Work?

You have to be an experienced Forex trader to really use hedging to your advantage, but what you basically want to do is to have as many short positions open as long ones for a particular currency pair; for example, if you have a Japanese yen/US dollar pair open, long, with five standard lots, open five standard lots, short, with the Japanese yen/US dollar. This will mean that both will move equally, which will offset your losses. You’re also protected from margin calls if the long and short positions are housed with the same broker, since you’ll have a gain in one position even if you have a loss in the other.

Other Hedging Strategies

The above has you holding long and short positions in the same currency pair, which is probably the simplest and easiest to follow hedging strategy. However, there are other hedging strategies, too, that you can use in Forex. You can do what’s called a “carry game,” whereby you open one position with one broker at higher interest, and then open the reverse of that position with another broker. You’ll gain interest or “rollover” by doing that.

Holding long and short positions with the same currency, as previously stated, is also a common hedging practice, or you can use different currency pairs (one in a long position, one in a short position) with similar movement to achieve similar results, as well.

Other hedging techniques involve derivatives and the most common types are future and options. However using these instruments is more complicated.

Hedging needs Money

Keep in mind that because the Forex market moves so rapidly, your price movements are probably going to be less than 1%, which won’t make you a great deal of profit unless you have a good deal of capital invested. So hedging is only for you if, one, you are an experienced trader; and two, if you have enough capital to invest to make it worth your while.

Hedging Doesn’t Guarantee Gains

Keep in mind as well that even though hedging is a great way to offset losses, you’re not going to completely eradicate the possibility of loss even with hedging. So be careful, and make sure you know what you’re doing.

Some types of hedging illegal in the US as of spring 2009

One final note is that as of May 15, 2009, retail Forex customers can no longer take “long and short positions in the same currencies in the same account.” What that means is that you can no longer do what is probably the simplest and easiest to keep track of method with hedging, which is taking long and short positions with the same currency pair in the same account. However, there are ways around this ruling, in that you can use other techniques to hedge and/or go offshore with your trades.

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