Hedging: What is it?
Hedging is most famous method that makes it possible to cover Forex risks. It consists in holding both a buying and a selling position on only one and the same currency pair. Caution, this method is not always authorised by brokers since certain platforms automatically close your first position at the opening of the second. In this case, nothing prevents you from trading on two different platforms.
To summarise, the principle here is that the benefit obtained on one of the two positions will help compensate the losses incurred by the other position. But for this to work you must of course envisage losses that are lower than the potential profits, as, to the contrary, you would find yourself with a negative result.
How to implement a cover strategy on the Forex?
To implement a “hedging” type cover strategy on the Forex, you must above all choose a short position. This means that you speculate on a short-term rise of the currency pair you are following. You will therefore place your stop and limit orders according to the indicators available such as the support and resistance levels.
In parallel, you will open another position on this same currency pair, but this time, over a longer period. To work well, your limit should be positioned higher than the resistance value in order to benefit from a possible crossing of this by the asset price.
In this way, if your first position finishes above the value limit, you will benefit from additional profits, and if your position is sold by reaching your stop, you will be able to recover your losses when the price finally reaches the long limit of your second position.
The other techniques enabling you to cover losses
There are several other methods making it possible to cover losses while speculating on the foreign exchange market. The first consists in diversifying your portfolio by including values that react in an opposite way to the various indicators. Here also the duration of your position will be an essential factor.
For example, you can speculate on the short-term rise of the Dollar and in parallel, open a long term position on gold. In this way, if you experience losses on the Dollar, those will be compensated later with the gold profits which generally react with a rise when the Dollar falls.