There are many trading techniques in the Forex market such as scalping, long-term investing (god palm command), speculation (surfing) and many more. Among them, Hedging is one of the Forex trading techniques that many investors choose to use. Today we will introduce you to the word Hedge, Hedging that many investors may be new investors do not know. In this article, we not only introduce what hedge is but also guide how to do hedging, to see how people apply hedging and what for.
Watching: What is Hedge?
What is hedge?
Hedge or hedging is the opening and closing of orders at close intervals to avoid the risk of forex trading against future price movements. That is, you will buy and sell 1 currency pair at the same time, so when the price goes against your prediction, you can still protect your position to wait for a suitable opportunity and close 1. Trader then waits for the other trade to break even or take profit.
Forex hedging eliminates the risk of trading for a period of time, but you will also incur trading costs that come with currency pairs. In fact, financial markets are created based on the principle of hedging, where transactions on one side reduce the risk of another party.
An American multinational corporation may accrue revenue in a variety of currencies, but will report its earnings and pay dividends in US dollars. Companies will hedge in different markets, to offset business risk caused by unexpected risks. For example, an airline can hedge the risk of rising oil prices by buying crude oil futures. This will protect the company against the risk of increased costs from oil prices.
Another thing is when the company purchases internationally priced castor oil in US dollars. When the futures contract expires, the crude oil company will deliver the actual oil and the airline company will pay in US dollars. If a company is not in the US, this can introduce currency risk. Therefore, many companies will choose to hedge their risk by using foreign exchange.
To do this the company will sell local currency and buy US dollars and thus gain exposure to crude oil trading. It’s not just companies that are interested in hedging. As an individual trader you can also hedge against the loss of your native currency by buying foreign exchange.
What is the hedging method? Explain the hedging strategy
Forex hedging, also known as hedging, can be done in a number of different ways in forex. You can either use partial forex hedging, as a way of countering the hard effect of when the market goes against your predictions, or you can use full forex hedging orders to completely eliminate the negative effects of your forex hedging. future prices. With forex hedging, there are several options you can choose from such as spot contracts, futures contracts and options contracts.
# How does the hedging method work?
Forex hedging is the act of cutting your risk against unwanted price moves. Obviously the simplest way to minimize risk is to reduce or close trading positions. But there may be times when you just want a temporary or partial reduction in risk. Depending on the circumstances, a forex hedging strategy may be appropriate.
# Create HedgingOpen Buy and Sell orders during 19:00, at the same value 1.4211. The reason that investors open buy and sell orders is because investors are not sure whether the price will go up or down, so they open 2 buy and sell orders at the same time. Because regardless of whether the price goes up or down, investors will not lose their capital, because they both buy and sell in the same time period. Only the spread fee (if any)
After opening a Buy and Sell order at the same time, the price changes downward, causing the open buy order to be deducted -$500 and the sell order +$500. So no matter how the price moves up or down, the investor’s account will not be affected because how much one loss will make the other. However, in this situation, although there is no loss of capital, the investor also has no profit.
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After opening a Buy and Sell order at the same time, the investor realizes that the price will have a downward trend, so he will close the buy order at 1.4082 and lose -$500 and keep the sell order.
Then the price fell back to 1.3966, the investor decided to close the sell order to take profit from the sale with a profit of + $1,100. If we subtract the loss of the initial buy order -$500 and the profit from the sell order +$1,100, the investor still has a profit of +$600. This is how hedging is done.
Things to know about Hedging:
1. Hedging is suitable for investors who are not confident in the general condition of the market, so they have to open both opposite orders. But when deciding to close one of the two orders, the investor must be sure that the price will go in the direction you predict. Otherwise you will lose both orders, like if you buy and sell at the same time, the price goes down, investors close buy orders, keep sell orders. But right after that, the price changed rapidly, in this case both buy and sell orders lost capital.
2. Doing Hedging, investors will have to pay Spread fee 2 times more than usual because of opening 2 times the order.
This is considered one of the interesting strategies, suitable for investors in the Forex market. But don’t forget that not all Brokers will allow Hedging, don’t forget to consult Brokers before deciding to open a trading account and investing is always risky, investors should find out. information carefully before making an investment.
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Last word on forex hedging
Forex hedging is hedging, but you will pay a price. Of course transaction costs will arise as you trade more. Forex hedging helps you to protect your capital when the market moves in an unfavorable direction, but if it goes as expected you will also lose the profit you did not make. Use a reasonable forex hedging strategy against large fluctuations in the magnetic field. Do not abuse it because it can be a double-edged sword!.
