Forex trading is the game of risk and reward. If the traders expect bigger rewards then they need to take bigger risks. The reward may be in terms of either profit or loss. Profit is what every trader wants to earn but no one wants to suffer loss. The possibility of loss is the main reason that limits many traders to take big risk. The traders willing to take big risk always ask a question to themselves that whether there is there a way to make the deals safe from the loss. The experts have continued to think of such a way that could make the deals of the traders safe from the loss. If there would have been such a way that would have saved trades from losses then every trader would have dealt in big lot sizes but it is a disappointing fact that there is no such trick or technique that could save 100% loss of the traders.
Although there is no such way that could save 100% loss of the traders but there exists a way by which the total loss of the traders could be reduced. The loss could be reduced by insuring the trades. This method of protecting a trade from the big loss is known as forex trading Hedging. So forex hedging is a way to reduce the loss of the forex traders if something unexpected happens in the foreign exchange market. Forex trading Hedging can be simple or complex so let’s start with the simple forex hedging first.
- Simple Forex Hedging
Simple Hedging is the direct hedging that happens when the traders place the sale order at the same time when they place the buy order. If the traders can time the market correctly then they can earn more money without taking additional risk or making additional investment. Now the question is that how the simple forex hedge operates. The simple forex hedge operates by allowing the traders to trade in the direction opposite of their initial trade. They can place a new trade without closing the initial trade. Whenever the traders doubt that the market may reverse now and go back to favor their initial trade, they can close the hedging trade or place a stop on it. The advantage of the direct hedging is that the traders make money even when the market moves against their initial trade.
- Complex Forex Hedging
After understanding the concept of the Simple Hedging, the traders can progress to learn the concept of the Complex Hedging. The complex hedging is basically placing the hedges at the multiple price levels. A trader should try for the complex hedges only if he clearly understands the concept of the complex hedging and also if the brokers allow to place the hedges using the same account. Many brokers do not allow placing the hedges from the same account so in such situations the traders should have one more account with the same or different broker to place the hedges.
- Reasons of forex trading hedging
The main reason of hedging is to limit the risk placed on trades. Hedging not only reduces the loss but if timed correctly then it can also be helpful in earning the profit. Thus hedging is also a technique to make bigger gains. The results of hedging are positive but this technique should be carefully applied and should be used by those experienced forex traders only who understand the market swings and can time the trades most accurately. If you try the simple or complex hedging techniques without having the enough forex trading experience then this may also bring an end to your forex trading career.