Basic methods for risk hedging on Forex

For traders who make money on Forex in 2020, the question of hedging is not worth it. Risk hedging on Forex is one of the main points, in addition to making profit, which worries every trader as soon as he enters the currency market.

This is due to the fact that the trader wants to protect the existing or potential costs of Forex for opening trades from undesirable fluctuations, which can lead to their loss-making closing.

Currency exchange brokers give traders the opportunity to hedge risks on Forex in two main ways:

• Simple risk hedging on Forex.
• Comprehensive risk hedging on Forex.

Let's take a closer look at each of the ways to insure your money from losing it in Forex trading.

Simple risk hedging

Some brokers provide traders with the ability to directly hedge risks on Forex, which means you can buy a currency pair and at the same time place trades for sale of the same currency pair. While the net profit will be zero, you can place two types of trades, which at the same time can allow you to increase your profit if you choose the right moment in the market.

The method by which a simple hedging of risks protects a trader is that you can trade in the opposite direction from your initial trades without having to close the initial trades.

Integrated risk hedging

Since many brokers do not give traders the opportunity to directly hedge risks on Forex, in this case, traders use other hedging methods. Comprehensive risk hedging refers to hedging using multiple currency pairs.

Hedging risks on Forex using multiple currency pairs involves opening transactions with an additional currency pair in order to insure against the risks of losing money from a transaction with the main currency pair that you have chosen for your trading. This approach refers to complex hedging techniques and is therefore recommended only for experienced traders.

The main reason traders use forex risk hedging in their trading plan is the desire to limit their trading risks.

Forex Hedging Risks

The risks associated with hedging a foreign currency position are usually lower than the risks you would have if you left the position without hedging.

However, if you cannot hedge a position in full or if the expected risky situation does not materialize, then when hedging, you are exposed to the same risks as if you opened this position with a speculative purpose.

Another risk associated with hedging is manifested in cases where the base position could end up being profitable, but the use of hedging completely or partially eliminated this profit.

The result is disappointment from the missed opportunity, deterioration of the competitive position during the bidding process or even criticism from the management regarding the quality of risk processing.

When Forex Hedging Works

Since hedging is designed to reduce risk, when hedging on Forex, the risks are usually lower than the risks that you would have taken if you left your initial position unprotected.

Thus, hedging usually works well if the initial position is losing money because hedging compensates for this loss.

It is hedging of risks on Forex that can become the most important and significant part of your trading plan, on which your result in the game on the exchange will depend. But it must be borne in mind that hedging should be used only by experienced traders who have already learned to thoroughly understand the market fluctuations and its time frames.

Remember that working with risk hedging on Forex without the necessary skills and experience can be a disaster for your trading account.