When trading forex you will notice that all trades present with a certain degree of risk. If you do not manage this risk correctly it is highly likely that you will lose great amounts of trading capital. Hedging is one method of protecting yourself. Before utilising hedging you must understand what hedging is and the hedging strategies available. There are both simple and complex hedging methods and information on each can be accessed online. Once you have an awareness of this method you will be able to protect yourself effectively.
The hedging method
Traders utilise hedging as a method of protecting themselves against damaging losses when trading on the forex Australia market. Many individuals will view this as a form of insurance against potential losses which may be experienced. When using hedging you are reducing the amount of capital you will lose if the market turns unexpectedly.
Simple hedging trades on the forex Australia market
One way of hedging on the forex Australia market is via a simple hedging trade. This is also known a direct hedging. In order to use this method you will have to open a trade to purchase a specific currency pair. At the same time you will open another trade selling the same currency pair. During the time that these two positions are open you will not be earning any money. However, once you determine which direction the market is heading you will be able to close one trade and make a profit.
The simple heading method is protective through the double trade strategy. If this method is used correctly you should have both positions open; it your preference as to which you close and which you continue trading to a potential profit. While hedging is a protective method you should include stop losses as a back-up precaution. Just because you are using hedging does not mean you should forget the implementation of a risk management plan.
Complex hedging trades on the forex Australia market
Only once you have mastered the simple hedging method you can consider using a complex hedging method. There are various complex hedging strategies available on the forex Australia market which can be examined. However, it should be noted that many forex brokers do not allow direct hedging on trading accounts. This means that you may have to open multiple accounts to utilise hedging strategies.
Trading different currency pairs when hedging
It must be noted that you do not have to use the same currency pair when hedging. Many traders you use this strategy will hedge one currency using at least two different currency pairs. If you choose to trade with numerous pairs you should have one common currency in all these pairs. However, you must consider the disadvantages of hedging with different currency pairs.
One drawback is that the fluctuations of the second currency in a pair can cause difficulties. If one currency strengthens against the other in one pair, you may not be able to note the counter action in your second pair. This raises risk instead of reducing it which negates the function of hedging.
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