Forex traders can use hedging as a means of reducing risks. A forex hedge usually exists whenever a currency trader enters a trade with the intention of protecting an existing or anticipated position against an unwanted move in exchange rates. When a trader buys a currency pair (or enters a long position), he/she can use a hedge to protect the investment against any downside risk and vice versa.
Direct hedging usually occurs in forex trading when opposing trades are entered simultaneously; for instance, when a trader buys a currency pair and also enters at the same time as a trader who sells the same currency pair. The net profit is zero while both trades are open, but the idea is that one of the trades eventually will make money and the other position will have to be closed. Hedging brokers will state if they allow direct hedging or not.
HOW TO CHOOSE THE BEST HEDGING FOREX BROKER
1. TRADING PLATFORM
Trading platforms serves as the trader’s portal to the markets. By bearing this in mind, traders should ensure that the platform and any other software is very easy to use and navigate, visually pleasing and should also have a technical and/or fundamental analysis tool. The trading platforms should also offer avenues through which trades should be easily entered and exited.
2. NUMBER OF PAIRS OFFERED
The next factor to be considered should be the number of currency pairs available for trading. This is because only a few get the needed attention and therefore, trade with the highest degree of liquidity. The major currency pairs are; USD/JPY, EUR/USD, USD/CHF, and GBP/USD. These currency pairs tend to trade in more predictable movements and ranges; however, many more currency pairs are traded.
3. PROVISION OF DEMO ACCOUNT
Most of the brokers usually offer a free demo account so that traders can test run the trading platform before creating and funding the real account. This gives the traders the opportunity of using the platform to determine if it is intuitive, robust and user-friendly or even complicated.
A good forex broker should be governed by rules and regulations, programs or services to protect the integrity of the market. They should be able to protect the public fraud, manipulation and abusive practices which are related to the sale of futures and options and to encourage open competitive and stable futures and options markets.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.