What Is FOREX Hedging?
The FOREX market has increased in popularity in recent years. FOREX trading consists of buying and selling foreign currencies pairs with the intention of making a speculative profit.
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Function
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Hedging provides FOREX traders the opportunity to lock in some profit before the volatility of the FOREX market goes against them. This is desirable so that traders can offset some risk.
Identification
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FOREX hedging allows traders to mix trading durations on a single currency pair. For example, if you are currently trading long on the EUR/USD, (euro/U.S. dollar) then you might want to make a one-day short on the EUR/USD if you have evidence that the EUR/USD will drop over the next day, but not long term.
Considerations
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Since certain currency pairs are leading indicators of the general direction of the market, then you may want to hedge your trades against the typical bellwether currency pairs.
Potential
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Hedging will also prevent the dreaded margin calls that occur if the values of your current trades decrease rather rapidly.
Warning
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Although FOREX hedging generally decreases risk, it may take away from some long overdue profits that substantially increases a FOREX trader's bottom line. For example, if your trade is successful, hedging against the specific positing may not be smart.
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