Hedging in Forex.

One of the most well-known options for reducing risks is Forex hedging. Moreover, this is not only the most famous option, but also the most controversial: some traders refuse it on principle, while others make money only with its help.

Hedging is a method of reducing financial risks, in which two transactions are made in different directions, but in the same volume and for a similar group of assets.

There are many examples of hedging; the most obvious is the reduction of currency risks in transactions with various currencies.

For these purposes, two transactions are opened simultaneously to buy and sell for the same currency pair and in the same volume, now no matter where the exchange rate goes, the financial result of the operation will remain the same. Since losses on a losing trade are offset by profits on a profitable one. We will talk in more detail about how to carry out hedging on Forex below. In addition to currency markets, this risk reduction option can be used on almost any exchange; this mechanism is called futures contracts and has been used for more than 50 years.

Scheme of Hedging in practice.

Forex hedging is most often used as an alternative to using stop loss and trailing stop orders; unlike the latter, this option for reducing losses is more flexible and allows the trader to independently decide when to close a position.

For example.

First, we open a buy deal on the GBPUSD currency pair, with a volume of one lot at a price of 1.5350, and in order to fix a loss at the level of 20 points, we place a pending sell order with an indicator of 1.5330.

If the trend does not meet our expectations and the price of the pound sterling begins to decline, a pending sell order will be triggered; this will be hedging, after which our position will be locked.

And if the price continues to decline, the resulting loss will be compensated by the profit from the second order. And even if the price drops to 1.5300, the loss on both transactions will still remain 20 points. After hedging with a sale has occurred, the trader needs to decide which position to leave and which order to close. It’s clear that we leave a profitable Forex order , but the main thing before making a final decision is to check whether there really has been a change in the direction of the trend or whether there has been a short-term rate correction.

Disadvantages of hedging.

If this operation is not carried out to make a profit, but only to reduce risks, then everything is simple - you immediately concluded a futures contract and protected yourself from price changes.
       
In the case of hedging on Forex, everything is much more complicated, because in order to make a profit you must close one of the positions. And in case of an error, you can only increase the size of existing losses. Therefore, it is recommended to fix the financial result using the second transaction only if you are 100% sure of the reversal that has occurred and know its reason, and for this you need to know how to determine the trend .