Hedging is a relatively common method in foreign exchange trading, but the concept of foreign exchange hedging may be relatively unfamiliar to novices. Let me introduce you to what is hedging foreign exchange and what are the trading strategies for foreign exchange hedging.
Hedging is the most common in the foreign exchange market, focusing on avoiding the risk of single-line trading. The so-called single-line trading is to buy short when you are optimistic about a certain currency, and sell short (short position) when you are bearish on a certain currency. If the judgment is correct, the profit will be more; but if the judgment is wrong, the loss will be larger than the hedge. The so-called hedging is to buy foreign currencies at the same time to buy short. In addition, another currency must be sold, namely short selling. In theory, buying a currency short and selling a currency short requires the same silver code to be regarded as a real hedging order. Otherwise, the size of the two sides is different and the hedging function cannot be performed.
To put it simply, foreign exchange hedging is to go long and short the same product at the same time. Foreign exchange hedging can offset the floating profit and loss of a trader’s positions in two different directions with the purpose of reducing risk. However, traders need to be careful not to use hedging as a conventional trading method and not to use it frequently.
What are the strategies for hedging foreign exchange trading:
- Buy and sell the same amount of the same currency pair at the same time. Then let them run freely. When one of the orders goes up, the corresponding one will go down. After withdrawing profit from the profit, we wait for the loser to reverse. This trick works well in a market that fluctuates repeatedly.
- Buy (or sell) a special number of a specific currency pair, and then buy a special number of another currency pair that usually moves in the opposite direction. This seems to be called a quasi-hedging strategy. In fact, this hedging has another characteristic: it can earn interest. The interest accumulated from holding positions every day can generate an annual interest of up to 50% of the total account balance.
However, it should be noted that hedging does not apply to all situations. When investors want to hedge foreign exchange transactions, they must think carefully before making a decision.
Hedging foreign exchange trading strategies
How does foreign exchange hedging make a profit?
Traders may have questions. How to make profits when foreign exchange hedging is both long and short at the same time? In fact, foreign exchange hedging is about currencies, not just currency pairs. For example, if a trader wants to hedge against the euro, he can go one lot of EUR/USD and then short another lot of EUR/GBP. This can also achieve the purpose of hedging. As long as hedging reduces the risk and achieves more profit with less loss, it is still profitable overall.
What are the skills of foreign exchange hedging?
- Try to hedge when the exchange rate drops to an important support level or may break through an important resistance level.
- When hedging, control the position size and transaction scale.
- Hedging should be used as early as possible and not waiting for passive use.
- The stop loss must be set when performing foreign exchange hedging.