Simple Hedging Strategies
Hedging is a method of reducing losses when trading on the Forex or stock market. It is based on opening counter positions to unprofitable trades.
However, it should be noted that there are other options that are used in the stock market.
This technique has almost the same number of both supporters and opponents, it all depends on the methods of hedging and on the specific conditions in which trading takes place.
One way or another, Forex hedging strategies have their right to exist and, with careful fine-tuning, sometimes allow you to pull out practically hopeless transactions.
Example of use : There is an uptrend on the chart of a currency pair, you open a trade of 1 lot in its direction.
After this, a sell order is opened, as a result, while the downward trend on the first transaction continues, the loss continues to increase, and on the second, the profit gradually accumulates.
Ultimately, the hedging strategy allows the price to be fixed at 200 points and not rise further. After analyzing the existing trend and receiving confirmation of its downward movement, the first order is closed, while the second, profitable one, continues to be maintained.
The main mistake traders make is mistaking a correction for a market reversal. In this case, after the first order is closed, the loss on the second order may also begin to grow, which will only lead to further losses.
To prevent this from happening, you should always analyze the size of the correction (pullbacks), and open a counter position only when you are completely confident in a trend reversal.
A channel indicator can be a great help in this matter; with its help, we construct a price channel on the selected time interval, thanks to which the magnitude of a possible correction will be clearly visible.
In addition, you should always pay attention to the situation on a higher time frame; this should become your primary reference point. For example, if you're trading on a 15-minute time frame, focus on what's happening on the 30-minute time frame.
For the most part, hedging strategies are more applicable to transactions that involve actual deliveries of currency; as you understand, they have nothing to do with speculative trading and are used only by large exporters and importers in the foreign exchange market.
To confirm this statement, try hedging positions on a demo account and you will see for yourself that achieving a positive financial result after this is quite difficult.
The only option for using such a hedging strategy would be to obtain additional profit through rollbacks.
For example, you have determined the direction of the main price trend and opened a trade. At this point, the price begins to move in the opposite direction. We open another order in this direction, maintain the second position until the trend moves back in the direction of the main trend. We immediately close the second trade with a profit and continue trading.
This trading option is described in more detail in the article - http://time-forex.com/praktika/lokirovanie-forex
Hedging strategy on different assets
This strategy is actively used by various funds; its essence lies in the fact that hedging occurs not on one currency or security, but on assets from different categories.
However, transactions may not always be opened in opposite directions; it all depends on whether the correlation direct or inverse.
For example, it is known that when airline shares become cheaper, securities issued by railway companies become more expensive, so two investment portfolios are created from both types of shares.
As a result, if airline stocks begin to decline, their value will be offset by rising railroad prices. There are also other stable correlations between various exchange-traded assets that can be exploited when applying this risk hedging method.
In addition, an interesting option is when hedging strategies are used to insure losses in transactions designed to generate dividend income.
In this case, one type of security, namely the shares of a single company, is bought and sold simultaneously. By working with multiple brokers, you can create a combination that will allow you to profit in the form of dividends regardless of whether the share you purchased rises or falls in price.
