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Understanding Hedge Trading Forex Strategies

Forex Strategies

When you trade in the forex market, you will always have to face a certain amount of risk.  This risk can be controlled by using a number of different methods; from risk management to hedge trading.  It is important that you know about all the risk limiting forex strategies available so you can choose the one that best suits you.  Two methods you could make use are simple and complex hedging forex strategies.

What is a Hedging Method?

Before you can consider the strategies to use you need to know what hedging is.  In the forex market hedging is protecting yourself against the risks you face during trading.  Hedging is often seen as an insurance against major losses on the market.  Many traders use hedging to limit the amount they lose if a trade turns against them.

Simple Hedging

The first strategy that you should consider is the simple hedging strategy which is also known as direct hedging.  To use this strategy you need to open two trades.  The first trade will buy the currency pair and the second will sell.  This allows you to play the market in both directions.  Of course, while you have both of the trades open you will not be making or losing money.  However, you are able to determine the movement of the market and then close the trade that would lose money.

The protection that this type of hedging offers comes from this double trade.  You are able to determine the direction of the market and you are not going to lose money with false indicators.  There is one problem with this kind of hedging and that is many forex brokers do not allow it.  Many brokers make it impossible for you to open a buying and selling trade on a single currency pair.  This means that you may have to open a different account with another broker to complete hedge trading.

Complex Hedge Trading Forex Strategies

Complex hedge trading should only be considered once you have mastered the art of simple hedge trading.  There are many different complex hedging strategies that you can look at.  These strategies generally rely on a basic knowledge of simple hedging.  There are also many forex brokers that do not allow complex hedging so you may need to have multiple broker accounts.

One of the easier complex hedging strategies is to use different currency pairs to hedge.  This means that you hedge one currency pair is a different currency pair instead of opening a buy and selling trade on one.  If you look at this strategy you need to have a common currency in both of the pairs.  This common currency will be the base currency in one pair and the quote in the other.

There are a number of problems that traders find with this complex hedging strategy.  The main problem is that the currency pairs do not move in tandem because they have one currency that is different.  The fluctuations in the second currency can remove the benefits of hedging.  Due to this problem many traders do not recommend using this form of hedging.

Before you make use of these strategies, you should be sure to test it in a demo account.

 

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