Forex Hedging is a strategy where the trader takes two opposite positions to lower the risk in case the market goes against his/her trade. This simply means that you get into another trade to guard against unforeseen event. This may sound like a low risk strategy however one needs to keep in mind the brokerage and transaction costs on both the positions and then the investments required for taking both the positions.

Further, lowering your risk does lower your profits too. Let’s suppose that your actual trade moves as anticipated while on the other hand your hedge positions will be in loss so on an average you would be making less money. Considering this point not all the traders get into hedging their positions but in some situations where there is a fear in your mind that market may turn against your anticipated trend then hedging does prove to be a safe bet.

It is possible to protect your risk by dealing in one spot foreign currency trade and another spot foreign currency trade to hedge your risks. However, this may not always work for the traders because of the quick delivery time of spot currency contracts. Therefore if a trader wants to hedge their risks for longer duration of time then they can choose to take an opposite positions through forex call or put options contract.

In the mid 2009 a prohibition was introduced on forex hedging by National Futures Association (NFA). Large numbers of brokerage firms are part of this association. So if a trader intends to make a hedging trade then his or her trade account might get closed out by the brokerage firm.

There always is a work around, so if you still wish to hedge your position then you need to choose a brokerage firm that also has an operation in a country where hedging is still legal. For example UK is one of such country where a trader can hedge their position at the time of booking your contract. So to offer a forex hedging feature to their clients, most of the larger brokerage firms have a branch in the UK as London happens to be a major foreign exchange trading floor. Being a trader you can simply ask your brokerage firm to transfer your account to the UK branch. If Forex hedging is the prime strategy how you are targeting to make money in currency trading then you must choose a broker who has a branch in some country where hedging is legal.

Tweet This Post