Hedging is a common practice in Forex markets and Forex hedging is indulged in not just by huge companies but also small investors. Many traders may have never realized it but they were in fact actually hedging even before they were aware of this strategy of protecting their assets in the Forex markets. You should know that the Forex markets are very volatile and can lead to unexpected losses. To cover yourself from these risks and to protect your assets, Forex hedging is done to offset the loss in one trade with profit in another one. In effect, you hedge one trade with another trade in this technique.
Do Not Think Of Forex Hedging As a Tool to Book Profits
Forex Hedging is not an investment strategy to earn profits from Forex markets. It is used as a shield to cover your losses. It goes without saying that losses in money markets remain inevitable and you need to be prepared to overcome the losses with the help of hedging so that these losses are not big enough to pinch you. It is like buying an insurance policy to provide protection to your investments in the Forex market. But you have to do Forex hedging in such a manner that the costs involved with Forex hedging do not exceed the losses that you suffer when you have no such cover.
The simplest of ways to cover your losses in Forex trading is to do direct hedging. This means investing in a currency pair for both buying as well as selling. You are not aiming to make any profits with both these trades remaining open but you have the freedom to trade in a direction that is opposite to the original trade without being required to close that trade. This method of Forex hedging is simple enough and traders can do it easily on their own though there are many more Forex hedging strategies that are complex and require the help and assistance of a broker.
Forex hedging will not make you rich but only limit your losses in the event of market swings and movements in a direction opposite to your anticipation. This is the reason why you should not take Forex hedging lightly. It is a strategy that one should employ in Forex trading to safeguard his portfolio.