Forex Hedging

Forex hedging is a strategy that many Forex traders use to help minimize risk in their accounts. This strategy is basically a way that you can protect yourself against unexpected risks in the Forex market. Here are a few things to consider about hedging maneuvers and how they work.

And by the way, this picture of a hedgehog is totally relevant to hedging in the Forex market...OK, not really. Unless you compare the feeling of accidentally sitting on this little guy to blowing out your account because you forgot to hedge. Then it's completely relevant.

What is Hedging?

If you have spent any amount of time in the investment world, you have most likely heard the term hedging. People even use the term "hedging your bets" regularly in many areas of life. This essentially means that you are placing a bet in the other direction to minimize the loss if you are wrong with your primary bet. People who invest in the stock market can hedge their bets by short selling stocks or using inverse mutual funds. This way, if the stock market goes down in value, they can still make money. The same basic principles apply in the Forex market.

Forex Hedging

In the Forex market, you have to pay attention to which direction the market is moving. If in your infinite wisdom, you decide that the market is moving upward, you would place a by trade so that you could take home some massive pips. However, if the market inexplicably went the other direction, you would potentially lose your shirt. The purpose of the Forex hedge is to minimize that loss if it does occur.

Putting it Into Practice

There are many different ways that you could potentially hedge your account in the Forex market. The most basic way to hedge is to take a position in the opposite direction of the one you already have. For example, if you have a long trade on the USD/JPY pair going, you would then open a short trade on the same pair. If the trade goes against you, you only lose a certain amount of money.

Limits

Even though this strategy can work to lower your risk, it also works against you to a certain extent. You lose some of your profits on every trade because you are taking a trade in the opposite direction. This strategy is definitely not for everyone.

Against the Rules

This type of trading is not allowed with certain brokers. If you have a broker that is located in the United States, you will not be able to use it. This is strictly for people who are outside the United States or have a broker that is outside the US. The National Futures Association decided that they would "protect" the retail trader from the dangers of hedging so they went ahead and outlawed it. Always check with your broker to see if they allow this type of trading before implementing it in your own account. Most of the time, if your broker doesn't allow it, the order will not go through when you try to place it.

Return From Forex Hedging to Forex Market

Return From Forex Hedging to Forex Trading