Forex trading is highly risky; therefore, forex traders take every possible step to mitigate the potential loss. One such method followed by several forex traders across the globe is hedging.
What Is Hedging?
In simple terms, hedging refers to the method via which forex traders can safeguard themselves from a potential financial loss. Typically, the concept is pretty similar to insurance. For example, an individual buys car insurance to protect themselves from future losses that may arise from any issue. The same happens in forex trading. Read More
From the forex standpoint, it can be said that hedging is insurance against the trades. Hence, if any unexpected event happens, the forex traders get assured that their amount will be covered via hedging. In general, a forex trader can ideally get a hedge against a specific foreign currency by using two separate currency pairs.
Generally, it is suggested that forex traders implement hedging as a part of their trading plan because it helps them safeguard against the massive financial loss that may or may not happen in the future. The professionals suggest that forex traders must have a clear understanding of the hedging concept to protect them from significant monetary loss. Read lqdfx review and get some ideas about forex trading.
Understanding Simple Forex Hedging
A simple forex hedge allows forex traders to protect themselves against financial loss. In simple forex hedging, the traders can effectively trade in the opposite direction of the initial trade placed. By doing so, the forex traders need not to close their initial trade. Hence, they get a cover against the potential financial loss. At the same moment, the forex trader can also trade to sell the pair.
The comprehensive risk is extensively reduced because the traders don’t invest more capital in the market. Therefore, as a result, forex traders can protect their existing capital via simple forex hedging.
Many forex traders claim they will implement different risk management strategies but don’t focus much on hedging. However, the forex experts heavily suggest that forex traders must lay ample focus on hedging as it is the best and top-rated risk management method to safeguard yourself from the ideal financial loss.
Generally, forex traders prefer to close the initial trade. Once the initial trade is closed, they re-enter the market at an updated price. However, the primary feature of implementing hedging is that the traders can enjoy their initial trade as no need arises to close it. Therefore, the risk is reduced, and the traders can ideally benefit from their initial trade without closing it.
Can Hedging Be Undone?
Yes, the hedging can be undone. For example, if the forex traders think that they are in favor of their initial trade, they effectively undo the hedging by opting for a stop-loss. Other than the stop-loss, they can close the trade.
“All the math you need in the stock market you get in the fourth grade.” – Peter Lynch
The forex market consists of several options via which a forex trader can undo a hedge. However, the methods are highly complicated. Furthermore, several forex brokers don’t allow forex traders to hedge directly; thus, the traders need to follow different approaches.
Why Hedge?
The primary reason to go ahead with hedging is to reduce the comprehensive risks. When the risk gets limited, the traders can efficiently trade in the forex market. Therefore, the approach is best for traders who are new to the trading world.
The Bottom Line
Therefore, in a nutshell, it is fitting to mention that the forex trader’s risk cannot be mitigated completely; however, it can be managed by ideally implementing hedging. Hedging allows forex traders to make a protected market move and make way for more profitable deals and returns in the future.
