Forex Education | What is Hedging?

Hedging is a trading strategy to "restrict" or "protecting" the fund trader from fluctuations in currency exchange rates are unfavorable. Hedging gives the opportunity for traders protect themselves from possible losses (loss) although he is conducting the transaction. The trick is to minimize the risk of losing money when the movement of currency exchange rate does not allow traders achieve a profit.

In accordance with the regulations, the loss a trader will stop when the price touches the stop loss point, or price movements turned towards that predicted by the trader. Such events often among traders. So if you're having that kind of thing, you do not need to pay too much attention to detail. Just do a scenario that most traders often done: set point stop loss that suit your trading system and do not easily panic when you see the price movement. In short, Buy and sell according to your current condition and use money management and risk management in your trading system.

Also read : Long Term Trading VS Short Term Trading

Common mistakes made by traders, especially beginners, is that they do not use money management. As a result, traders of this kind are always doing trades exceeds their capabilities. Whereas in other cases, the trader does not use risk management, so that the air-trading system they do not have the term "survive". They always "attack" against the trend going price, so they often end up with a loss.

In the situations mentioned above, shall be elected by traders hedging as a trading strategy. Because not only will protect from the risk of loss is great, but hedging can also guarantee a profit trading. In addition, hedging is also easier for the trader to make the next trading plan, without being affected by fluctuations in currency exchange rates.

Types of Hedging

There are two types of hedging with respect to fluctuations in currency exchange rates:
1. Buyer hedging
Buyer hedging is used to reduce the risk associated with the possibility of currency exchange rates are up.

2. Seller hedging
Seller hedging is used to limit the risks associated with the possibility of currency exchange rates are down.

While the type of hedging strategies are:
1. Classical hedging
This type of strategy is used when the trader is in a position opposite to the market and is mostly used by traders of agricultural products, especially in Chicago (USA).

2.Full and partial hedging
Full hedging implies protection against risks of adverse overall transaction. This type remove any possible losses that will be suffered by traders because of fluctuations in currency exchange rates.

While partial hedging transactions only protect part of trading.

3. Anticipatory hedging
This type work by estimating the purchase and sale well before trades are made. He worked well, especially in the real market. However, this strategy can also be applied in trading on the stock market, even to say this type are often used in these types of markets.

4. Selective hedging
Selective hedging is characterized by the fact that the transactions in the future of market will have variations in volume and order execution.

5. Cross hedging
Hedging of this type has a characterization that relate to the fact that the action in the markets of the future involves a contract, not on real assets in the market, but on other financial instruments. For example, the real market there are actions related bonus shares, but on the market in the future will involve more stock indexes.

Also read : Long Term Trading VS Short Term Trading

Although this strategy is able to make the traders make a profit, but actually hedging aims to reduce the potential loss on the transaction a trader.