4 Hedging Techniques in Forex

The term hedging seems to have some mystery around it – everyone is talking about it but no one explains what it is.  The first thing you have to know is that even as a novice trader, you can understand the hedging and the techniques most traders use to create good money management.

What Is Hedging?

Hedging is a great way to protect yourself from major losses. In a way you can address hedging as insurance. When you buy a car, you also purchase insurance in case of accidence, theft, unforeseen disasters. Hedging works the same way in trading – it reduces the impact of various unexpected risks involved in forex.

How to Hedge?

Traders combine several positions, which help to limit the risk. The trick is to take opposing positions in separate markets. When you think about it, you might argue that this technique will actually limit the profits, however any insurance costs and it works when you are in trouble! So does hedging when the market moves in unpredictable way and you are in a bad trade.

1. Use the Interest

One of the techniques involves going long with a currency pair that pays lots of interest and also go short with the same pair with another broker that doesn't charge interest.

The challenge here is to find a broker that doesn't charge interest. This is indeed not a simple task. And to make things worse, you will be paying the spread twice on both buy and sell positions.

2. Use the Futures

What is another way to create hedging system? You can use futures to protect your trading moves. You can go long in forex market and short in futures and get pretty good defense against the losses.

The downer with this technique is the fact that futures and currency trading doesn't have the same value and therefore you cannot completely cover the possible risks.

3. Use the Options

Let's see another way to hedge – options. With this technique you do not have to use stop loss. Using options as your stop loss you can stay in the market as much as you want, because you have the option to protect you.

4. Use Binary Options

Here is another idea. Why not protect yourself with binary trading? This might be unconventional solution but it might work wonders. With binary options you know exactly the risk involved and even with a lost trade in forex, you might get very lucky with binary.

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