Want to learn about forex hedging strategies? Have you ever heard the term “hedging your bets”? If so, you probably know it means to offset the risk in a situation by making other speculations. If you are not sure if it is going to rain, you might “hedge your bets” by taking an umbrella in the morning. When trading goods or services in a market, a hedge is another trade or trades made to offset the risk of the original trade. Forex hedging occurs in just about every trading situation, including forex. In fact, the volatility of the forex market makes hedges almost a necessity. For this reason, there are also hedge funds in most speculative markets, such as the forex market.
The most basic forex hedging strategy is offsetting short-term trades. These do not manage risk very effectively, so another hedging method using foreign currency options is more popular. The appeal of this method is that the purchaser can buy or sell a currency at a set date in the future but is not obligated to do so. This gives the trader some protection, especially from shorter-term trades. There are several strategies you can use with options. Some are called long-term straddle, long-term strangle, bull spreads or bear spreads. All of these terms can be found in an investment glossary and work to limit the potential amount you can lose on any given trade.
If you already do anything in the forex market, you probably realize how volatile it is. What looks like a safe bet one minute might not be a few minutes later. If you understand forex hedging strategies very well, you have the ability to provide insurance of a sort for your trades. Without this insurance, your profits could dwindle to nothing with just a few bad trades. A good hedging strategy (or several) will help you to keep up your financial health.
Not all brokerages allow hedging among retail customers. If yours is one that does not allow it or if you are still not sure how to apply the leading strategies, you can also contribute to a forex hedge fund. As with other kinds of hedge funds, a forex hedge fund is a pool of investments that manages risk with a wide variety and high volume of trades. Forex hedge funds require legal offering documents drawn up by an attorney. Although forex hedge funds are still high risk as with similar investment vehicles, they can also be a simple way to hedge your investments because someone else makes hedge trades for you.