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Hedging on the Foreign Exchange Market

Foreign Exchange Market Hedging

This article looks at the ways that you can hedge on the foreign exchange market.

Something you may have heard about when you learn about the foreign exchange market is hedging.  This is a kind of trading that protects you from losses to a certain extent.  It is important that you fully understand what hedging in the forex market is and how you can accomplish this.  There are simple and complex hedging strategies that you should know about.  However, you also have to consider what the problems you could face with hedging are.

What is Hedging on the Foreign Exchange Market?

Before you can implement a hedging strategy you have to know what forex hedging is.  Hedging is a way of protecting your trading account from major losses on the forex market.  It can be viewed as an insurance policy against the losses that you can face on the market.  Of course, some of the protection methods are very complex while others are extremely simple.

The Use of Simple Hedging

The simple forex hedging strategies can be used by any trader with any level of experience on the market.  Many new traders think that hedging is something that can only be done by experienced traders and this is not true.  Once you know what simple hedging is you will see just how easy it is for anyone to accomplish.

With a simple hedging strategy you will be completing direct hedging.  For this method you are simply going to be opening to positions on a single currency pair.  One of the positions will be buying the currency pair and the other will be selling the currency pair.  It is important that you open these two trades as close together in time as possible.  This removes any issues you could face with a change in forex rates.  The trades should also be identical in every way aside from the face that they are heading in different directions.

While you still have both positions open you are not profiting or losing any money on the trade.  To make a profit off these traders you should see which of your positions is making a profit.  You should then close the trade that was making the loss.  This is a great way to ensure that you are opening a trade that makes a profit.  It is also a good idea for times when you are not sure which way the market is going to move.  A lot of fundamental traders use direct hedging to ensure they profit on the trends from news releases.

What are the Problems?

When you look at hedging there is one major problem that you could face.  This problem is that the forex broker you are working with may not allow this.  There are a lot of brokers that do not allow you to complete direct hedging.  There is an option available to you if you still want to hedge and your broker does not allow this.

The option you have is to use a different account for the one trade.  Of course, this means that you need to have an account with two different brokers.  If you have two accounts with one broker the time it takes to log out of the account and into the other can cause a problem with the hedging trade.

 

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