Forex Hedging Strategies

forex hedging strategiesTrading in the Forex market can provide you with good returns, but it also comes with a fair amount of risk. If you are concerned about the amount of risk that you are taking on trading in the Forex market, there are some strategies that you can use to minimize the risk to your trades. One way to minimize risk is to get involved with hedging strategies.

Forex Hedging

Hedging is a strategy that involves taking a position in the opposite direction of a trade that you’re in. This minimizes the chances of a market reversal hurting you financially. In many cases, this can be done by using a pending order in your trading platform.

For example, if you are in a buy trade in the EUR/JPY pair and you’re worried that the market could reverse, you could place a pending sell order on the same pair. This way, if the market reverses and the price hits the threshold at which you placed the pending order, the market will trigger your order. At that point, the sell order will start making money and you can close out your original buy order. Even if you don’t close out the buy order, the new order will offset any losses that it creates.

Options

Another way to hedge your bets in the Forex market is to take out an option contract. An option contract gives you the chance to buy or sell a currency pair at a certain price, but you don’t have to if you decide against it. To get an option contract, you will have to pay a nominal option fee to the owner of the currency pair that you want to buy or sell. Then if you decide to exercise the contract, you can buy or sell the currency pair at that time. If the currency pair keeps moving in the right direction, you can simply let the option contract expire and you won’t have to worry about it.

Implementing the Strategy

If you plan on hedging in the Forex market, you will need to continually monitor your strategy to make sure that it is working. If you don’t pay attention to your trades, it could end up costing you in the long run. You have to make sure that the option contract is executed at the right time or that your original trade is closed out. Otherwise, you might end up throwing money away because you aren’t paying attention to the market.

Considerations

In some cases, hedging your investments may not be productive. If you have to pay too much for an option premium, the cost may end up eating into your profitability overall. Before you take out any option contracts or use any other hedging methods, make sure that they are truly necessary in that you feel comfortable with them. Otherwise, your edging methods may be counterproductive in the long run. It makes sense to try out any hedging methods that you want to employ on a demo account first, so that you get comfortable with them. Contact a LucrorFX specialist today for consultation.

 

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