In this way, you protect your position. The said protection is considered as a short-term solution. It is usually implemented by the trader due to volatility in the forex market or a big news that is likely to affect the entire forex market. Hedging is done by traders who try to eliminate or at least reduce the foreign currency risk associated with financial trading. Many companies choose to hedge in different contrasting markets to balance the potential risks.

Hedging is used by both major companies . everyday traders. There are a few different strategies and tools you can use to start hedging, and we'll explain a little more about each shortly.

Why do traders hedge forex?

There are many reasons why traders hedge Forex. It is usually a way to create a safety net against currency fluctuations. Similar to any trading arena, there is no real way to create a risk-free Forex environment. With this in mind, there is no denying that a hedging strategy can help reduce or at least regulate your losses.

Due to the fact that the Forex market in https://exnesscom.com/stocks-trading/ is inherently volatile, hedging with currencies differs somewhat from hedging in alternative markets. Admittedly, some traders feel that there is no point in hedging and prefer to just accept the nature of forex trading. Then there are some who would prefer to reduce their risk in such a volatile market.

The fact is, if you don't like accepting that forex trading can be risky, you may want to use hedging to offset short-term losses. If you feel that the value of a currency pair is decreasing before bouncing back, you can include hedging in your strategy. Next, we'll introduce you to some of the most popular strategies and tools used by traders who hedge Forex - so you'll be trading like a pro in no time!

Hedging Strategies

Now you know what it means to hedge in the context of forex trading. We have taken a deeper look at the different ways you can hedge in the forex market. Here are some of the most popular forex hedging strategies used today.

Direct hedging

Sometimes referred to as "simple hedging", this is usually when a trader opens two different positions on a current position. This will be one long (buy order) and one short (sell order) - so you are going in opposite directions.

Here is an example of what hedging looks like:

•     Let's say you already had a short position in a forex pair like AUD / USD.
•     Then news about an event that you believe will affect the USD
•     You decide to open a long position on the same pair
•     You have just hedged your forex trade

Your net profit on direct hedging is zero, so you keep your original position on the Forex market. This way you are prepared for when the trend reverses. If you hedge, you can make a profit on the second trade if the market goes against your original trade. If you decided not to hedge this position, you may have closed your trade and taken the loss on the chin. It is worth noting that not every Forex broker allows direct hedging, which is why they choose to settle the positions instead.