Forex hedging is a strategy traders often use to protect their trading position from an adverse move. Hedging acts as an ‘insurance’ for traders’ trade. It involves the opening of an opposite position to a current trade when high volatility events like general election or financial announcement is expected.
Imagine trader A has a long position in EUR/USD, anticipating the pair is going to move higher. But the UK government will be making a big announcement on the Brexit deal that for sure will bring a high amount of volatility to the Pound.
To mitigate the risk of a bearish market that the news might bring, trader A opens an opposite position to the current trade. Thanks to the hedging strategy, trader A successfully protects his trading account from loss and maintains his long-term position.
Hedging strategy offers a form of short-term protection when a trade is concerned about news or global events that may trigger volatility. It is all about reducing traders’ risk and protecting against unwanted price moves.
But then again, even though hedging strategy is a good way for traders to reduce potential loss, it should only be used by experienced traders that understand the market swings and timing well. It can be a useful tool if the market moves adversely but another loss if the market moves in traders’ favour.