When one talks of the Forex market, the visuals of minuscule profits pop up in one’s head. Exploiting the price deflections stands as the prime goal of every investor by contemplating the market strategies and charting systems. However, often traders face unprecedented losses due to poor risk management approaches. This is where the importance of Forex hedge system comes into play.
Hedging in Forex and Its Intricacies:
In a nutshell, the hedging can be considered as insurance for traders to protect their profits and investments against market landslides. The Forex market being highly volatile incurs a number of avalanche situations
In case of unexpected trend reversals.
When a user places a stop loss higher than the ceiling value.
Negligence towards charts and indicators.
Unplanned leverage in investment.
“Never test the depth of the ocean with both your feet.” – Warren Buffet
Hedging Forex system comprises of a number of strategies to make profits in this currency arena. These include:
- Direct hedging:
In this techniques, you as an investor can place a direct trade as specified by your broker. For instance, you open a trade that is looking to buy USD/EUR at 1.3001. However, this step involves a subsequent trade aimed at selling the same currency pair at 1.3004.
So, while the net profit may amount to just 3 pips, yet it ensures that a trader is not subjected to unnecessary market volatilities with this trade.
- Futures hedging:
Embracing this approach will allow you to purchase a currency pair at price A and set a future selling price B for the same. This price is set after crucial scrutiny of market scenarios and upcoming trends.
While you are ensured to sell your currency at a fixed price and make fixed profits, you will be safeguarded from any unknown losses that might have taken place due to currency fluctuations.
When to use hedging Forex trading systems?
Hedging as a technique may sound to be safe and interesting, yet its application is highly time dependent. It must be done only when you as an investor are unsure of the market situations and upcoming waves.
Another instance, when the importance of hedging comes to the surface is your initial leveraging days.
Consider a trader investing in Japanese Yen against the British Pound. This currency pair is running at 1.5006 and looks to hit a benchmark of 1.5017. While a potential rise in 11 pips may be tempting, it may face trend reversals at any instance.
Leveraging your money on such a high risk/reward situation may turn to be fatal if gone otherwise. Hedge Forex trading systems here is a wise step and may save your account from going broke.
Multiple hedge and its impacts:
A Forex hedge system can be used on multiple currency pairs. For instance, a trader may go long on USD/EUR and short on EUR/YEN. One may deploy a strike option in such situations. This means when the floor value of a currency pair is 1.2006 and predicts to fall at 1.2004, you place a Forex strike at 1.2006.
So, even if price falls below the floor value, your currency remains intact. Thus, you can clearly understand the efficacies of hedging in Forex and its associated impacts on the currency market. If you are looking to set your foot here, contact a reliable broker today and start trading.
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.