Surely more than once you have heard of the concept hedging in the context of operating in financial markets. Forex is a very common technique to cover open positions limiting the risk in them, and that is why every trader operating in Forex should know this technique, but finally decided not to use it.
First, it is important to note that the hedging strategy may be considered totally defensive. It is a strategy that initially looking to gain profit operations, but may simply be of great use to advance not close a deal with losses when the market read that we still indicating that we are positioned in the right direction.
It is usual to have to close a losing trade when money management cannot support a high number of pips against. But close the transaction no longer confirm that we are experiencing the temporary loss in the same when it is possible that sooner or later the market will return to take the leadership for the operation and what losses were to develop into profits.
Running a hedging strategy
The hedging technique enables one to go into a losing trade without this we are supporting a greater amount of loss as the price moves against us. How can we do this? It’s simple and intuitive: simply take a position contrary to the main operation to cover the maximum risk they are willing to take it.
With an example is much better understood: If I buy a lot of EURUSD at 1.0845, it is clear that I will get benefits whenever the price rises and losses if the price drops. But the price may not immediately take a bullish position at the time of our purchase, which would cover the initial losses that may be incurred by this operation simultaneously selling a lot of the EURUSD in that same area of 1.0845 prices.
Thus, even lower the price at an early stage, losing everything with my main purchase transaction in the win sales position, so my result will be neutral. With this hedging strategy, I can wait for the EURUSD actually take the expected direction and then I can close the short hedge and keep open only the main purchase transaction, reporting profits in my working.
Actually, hedging is more complex than that, because you can “hedging” in foreign or different products with negative correlation, can make hedging using derivatives such as options, hedging open positions with partial amounts, varying the ratio of coverage position, you can activate the hedge at a certain distance from the main, and so on.
But you should never forget that hedging involves paying a double commission, since two operations are opening, and must be managed dynamically, because in the end, to do absolutely nothing with the two open opposite positions, completely limit losses, but profits.