Forex trading is an activity that involves risks that the investor must both know and analyze. Market volatility can lead to sudden price changes, which does not allow for any certainty on the part of the trader.
However, there are still various methods available to cover these risks as much as possible. Among them, we can mention in particular the Hedging technique which deserves to be known. How then to cover Forex risks with Hedging?
The basic principles of Hedging
The Hedging technique is, without doubt, the most widely used in hedging Forex risks. It is a simple method to assimilate and practice, which actually consists of taking two opposite positions. The trader takes a position for sale and a position for purchase, in the same amount and on the same currency pair. This is to stabilize the account and achieve zero risk.
If the first position is not the right one, the second position – which is opposed to it – will indeed compensate for the losses. The course can only take one of these directions. Thus, this method aims mainly at a complete coverage of loss risks. Nevertheless, to avoid a zero result, it is necessary to anticipate losses lower than the potential gains.
Hedging also allows you to take advantage of correction movements. This offers opportunities for profit. However, before practicing it, it is necessary to check whether the broker in question accepts this method. Some platforms do not allow Hedging, but it can be done on two different portals. The objective remains the same.
A hedged position, no risk
Thus, the first reason that drives a trader to do hedging is to protect his capital. A hedged position means that the risk level is zero. Regardless of future price movements, when you hedge your position, you automatically protect your money.
But how exactly does it work? Given the volatility of the market, the trader does not know in advance whether or not his resistance to a position will break. In order to anticipate all the possibilities, he will then take the opposite position, on which he will put practically the same bet.
Thus, if indeed, the resistance breaks at a certain level, the trader will recover his losses with the opposite position. In addition, if the resistance does not break and the price returns to its original position, the trader can cut the second position and cash in the profit made. But in this case, its first position will again be subject to market risks.
The second reason why a trader will use Hedging is the possibility of profit offered by correction movements. In addition to capital protection, this method makes it possible to make profits by playing on the trend.
How do we do this? Imagine that the trader bets on the rise of a currency pair and takes a buying position. However, after price movements, it has identified reversals and anticipates a correction movement to a lower level. This scenario comes true, and he can pocket his profits on this position. However, his buying position will continue to grow and if he reaches his objective, the trader will cash in his second profit.
The correction thus makes it possible to make an additional profit and, even if the other position loses, it always compensates for the losses. Of course, to be able to win, the trader must know how to detect the key points and signals of a possible correction movement. The main advantage of hedging is that, at least, you get away with a white operation.
Other Forex hedging techniques
While hedging remains the most widely used method of protection in Forex, many other strategies can also be used by traders. In particular, they may opt for portfolio diversification by choosing assets with opposite reactions. They can, for example, bet on the rise of the Dollar over a rather short period of time, and then associate this investment with a long position in gold.
Another increasingly common method is also to use binary options in conjunction with Forex investments. Here again, it is a question of anticipating the riskiest moments and opening new positions in order to compensate for any losses.