Category: HEDGING SUPPORTED
Hedging is a way by which traders can protect themselves by getting heavy losses in a forex trade. Although loss cannot be totally eliminated but it is a way to reduce the amount of loss you would incur if something unexpected happened. The main reason that you want to use hedging on your trades is to limit risk. Hedging can be a bigger part of your trading plan if done carefully. It should only be used by experienced traders that understand market swings and timing. Playing with hedging without adequate trading experience could make you suffer huge losses.
The primary methods of hedging currency trades for the retail forex trader is through Spot contracts and Foreign currency options. Spot contracts are typically the regular type of trade that is made by a retail forex trader. They are not the most effective currency hedging vehicle because of a very short term delivery date. Whereas Forex currency options are one of the most popular methods of currency hedging. As with options on other types of securities, the foreign currency option gives the purchaser the right, but not the obligation, to buy or sell the currency pair at a particular exchange rate at some time in the future.
There are four steps a trader must know for forex hedging . First of all trader must identify the risk in that trade then determine the level of risk he can tolerate. Then determine his forex hedging strategy which is most cost effective. After finalizing the strategy implement it and keep an eye on it.