The Forex or FX currency trading system is the largest trading arena currently in the whole world. This market remains open for 5 and half days a week and trades in more than $5 trillion currencies i a single day. Due to such high volume of trades, the Forex market encounters minute price deflections at all times of the day. This is why often new as well as veteran investors look to opt for a Forex hedging strategy before setting their foot in this risky market.
What is a Forex hedging?
Hedging is a strategy or a form of trading approach in which an investor looks to protect his position against the unprecedented occurrences of the market. It is done to ensure that a trader does not risk his or her entire asset before investing in the currency market.
The primary motive of hedging is to prevent an investor going long from facing downside risks as well as protect an investor going short from upside risks. Statistics state that, the popularity of hedging as a currency trading strategy has grown by 76% over the last 5 years and this number is constantly on the rise.
Hedging Strategy for Forex- Popular Variants!
The Forex hedge strategy calls for two process of safe investments. These include,
Foreign currency options
Investing through Spot Contracts.
Let’s discuss each of them one by one
- Spot contracts:
Trades which are brought to life by your daily retail broker are known as spot contracts. These include a generic opening position, closing position as well as a chart which measures the approximate pip benefit possible from the trade.
Hedging with spot contracts has become a common approach nowadays owing to their high risk-reward ration and wide options of leverages.
- Foreign currency:
Hedging with foreign currencies is currently a growing approach among investors. Of the two Forex hedging strategies, this allows traders to take up currency pairs and purchase them at a future date.
Trading in futures safeguards their account from facing any unwanted loss thereby securing the entire transaction.
Having said everything, there are a number of factors which comprise the entire hedge strategy in Forex. They are,
A trader needs to use his discretion to judge the fraction of his transaction that he wants to hedge. This approach ensures that an investor receives the maximum profit at the time of going short.
Forex hedging strategy:
Be it day trading or carry trading, an investor must incorporate Forex hedges even while making necessary amendments.
The time duration:
This step determines the amount of time hedging in Forex strategies is likely to consume. This step helps an investor to decide between short term and long term trades.
Make necessary changes through the implementation of the hedge as and when required.
The above steps together demonstrate how a Forex hedging strategy can turn out to be. So, if you are looking to begin your trading career contact a broker of your choice and start investing.
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.