Many Forex retail traders think that hedging is a good way to minimize losses. When holding on to a losing position, they often forex hedging strategy protection against losses up some form of hedging strategy to protect themselves against further capital depletion.
Traditionally, hedging was used to protect the profits of multinational companies from unfavourable currency fluctuations. Hedging is a great way for these companies to protect their profits, but unfortunately many inexperienced Forex traders have incorrectly applied the same principles to their trading activities. At this moment, I would be facing an unrealized loss. JPY currency pair in the hopes that any gain in the latter pair will partially offset the losses of the former pair. Hedgers hope that the results of both positions will partially cancel each other out. This method of hedging is a deathtrap waiting to spring. The original purpose of a hedge was to reduce the uncertainty of company profits.
To the retail trader, however, this does the exact opposite! Such a hedging strategy simply leaves too many factors open to risk. JPY pairs are not highly correlated and may end up causing an even larger total loss in the end. Many people like to hedge because they don’t want to admit that they made a bad trading decision.
L International Computers the Next DELL? Is Online Forex Trading for You? Spot Every Big Trend Change With This Essential Indicator! Difference Between Paper Trading And Live Trading! When traders talk about hedging, what they often mean is that they want to limit losses but still keep the potential to make profits. Of course having such an idealized outcome has a hefty price.
Ultimately to achieve the above goal you need to pay someone else to cover your downside risk. In this article I’ll talk about several proven forex hedging strategies. The first section is an introduction to the concept which you can safely skip if you already understand what hedging is all about. The second two sections look at hedging strategies to protect against downside risk.