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Wednesday, 4 July 2012

Forex Hedging in the Forex Market

One of the low risk trading strategies is hedging. The technique might give an impression of being too complicated; however when done right, a trader can reduce the overall risks and make profits. What is involved in hedging? How complex is it? What can you expect from this strategy?

Forex Hedging reduces some amount of risk when holding an open position. What kind of risk are we talking about here? How about market falling down unexpectedly leaving you with losses you can't handle. This is a well-defined reason for using hedging in case you suspect that the currency pair of your choice may reverse against you.

Hedging technique involves holding a trade with one pair and opening another trade (or more) with a different pair, which is related to the first pair. The idea behind it is to reduce the risks involved - in case one trade goes bad, there still might be profit with the other trade.

Consider opening a position with, let's say, USD. Simultaneously you open a reverse of that position on the same currency (USD, in our case). In case any of the position starts loosing, the second one backs it up and therefore protects a trader from getting a margin call and gives a trader a chance to profit even if one of the trades fail.

Hedging, if done correctly, can play an important role in saving your account from losses. In fact, many professional traders with wide experience in market rapid movements and timing use hedging in their trading plan.

100% Hedging Technique

This technique is considered the safest and the most profitable among traders. The idea behind this is:
  • You trade with 2 different brokers - one that changes/pays roll over rates at the end of the day, and another that doesn't.
  • Open a trading position with currency A with the first broker.
  • Open a reverse position for the same currency A with another broker that doesn't charge interest for carry over.
With this technique, you have to be careful and consider several important factors:

1. Which currency to trade with?

Different brokers credit different amount of interest to the trading account for every 1 regular long lot.

2. What is interest free broker?

You have to find a forex broker that allows opening positions for an unlimited time and that changes small flat fee for every night of each lot held. Why is that a good thing, you may ask? In most cases, when a broker changes money for holding the position, you are most likely to be able to hold the position for unlimited period of time, which is exactly what you need.

3. How much money do you need?

If you don't have enough in your trading accounts, hedging won't work. The last thing you need is a margin call in the middle of your profitable deal. The only way to keep this from happening is to maintain large account balance or a way to perform quick money transfers between two brokers.

4. How to maintain the "losing account"?

You must have a smart money management plan. One of the well-known techniques is to take out the profits from one account and deposit the excess to the losing account. The main problem is that some forex brokers do not allow a withdrawal while your position is still open, therefore this is another thing that you need to check before starting trading.

See also www.forexvote.com, great resource for free forex trading tutorials.

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