Forex trading offers incredible profit-making opportunities for beginner traders. By taking advantage of a few simple trading strategies, they can be able to make significant profits even without having a huge capital outlay. As a result, the fact that it is popular among beginner traders is no surprise.
However, just as it is easy for a trader to make money, it is also easy for them to lose money. Therefore, while you may be overly excited to start using forex metatrader 4 to make money, it is always advisable to take steps in order to ensure that your exposure to risks is limited. The following are common hedging strategies that you can use to protect your portfolio from getting hit by catastrophic losses.
Direct hedging
With this strategy, all you do is take an opposing position to whichever trade you have already made. In such a case, if things do not go as predicted, the opposition position will nullify the effect of the losses that you incur on the original position.
This strategy is great if you have taken a long position on a given currency pair in the hope that the market will eventually move in your direction. And since, in the meantime, there is a probability of it moving against your bet, you protect yourself by opening a short position on it.
As a result, while you may end up not making any money in the short term, having shorted the currency pair will give you time to make a successful trade later on when the market moves in the direction that you predicted initially. Such a hedging strategy keeps you from taking a loss while you wait for the market to start swinging in favor of your original bet.
Hedging with multiple currencies
Unlike a direct hedge, this hedging strategy does not involve taking different positions on the same currency pair. Instead, you limit your risk exposure by taking positions on different currency pairs that are correlated in a positive way. Normally, you would take positions that are opposite to each other, making it more likely to limit the extent of risk you are exposed to.
For example, you can take both a long and short position on pairs that have USD. Let’s say you take a long position on EUR/USD. For this type of hedging, you will then take a short position on GBP/USD. In such a case, the losses that you may incur when the US dollar falls will be offset by the opposing trade.
Therefore, with this type of hedge, you are not going for a net balance of zero. This is because the euro and the pound will not always have the same movement. They are independent currencies and so there is always a possibility of making a profit if your strategy is successful.
However, it also has its downsides. This is because you will be effectively exposing yourself to the risks posed by the movement of both the euro and the pound. Therefore, unlike the direct hedging strategy, there is always the likelihood of making a loss.
Options hedging
Instead of dealing with currency pairs directly, you can opt for using options to protect your positions. If you are a beginner and you don’t have enough funds to take multiple positions on currency pairs, you will love this strategy because when it comes to options, you only pay a percentage of the value of the asset. Essentially, if things don’t go the way you predicted, you only get to cover the premium.
It is important to note that the availability of hedging opportunities that you have available to you will largely depend on the currency pair that you choose. Generally, going for a major currency pair will offer you a wider variety of strategies from which to choose. This, in addition to how much money you have at your disposal, will play a major role in determining the extent to which you can protect your trades.
