Forex Hedging


Forex hedging is used extensively in the forex market. As many successful traders believe that forex hedging is the best way to reduce trading losses, it is worth exploring this topic in greater detail.
First of all, what is forex hedging? Forex hedging involves buying or selling correlated currency pairs (i.e. currency pairs that move virtually in lockstep) to protect the trader from adverse market movements. Examples of correlated currency pairs for the EUR/USD are EUR/JPY, EUR/JPY, and EUR/CHF. Historically, forex hedging was the domain of large companies seeking to reduce their exposure to headwinds in the currency markets – in other words, it was a form of risk insurance. These days, forex hedging is widely used as a trading technique for forex traders seeking to protect themselves and boost their profits in the short term. Not all forex traders use it successfully, and sometimes traders misuse it, doing more harm than good to their portfolios.

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Let’s take a look at an example of forex hedging. Suppose a trader opens a long position in the EUR/USD pair. The market moves down, and the position is now in unprofitable territory. Now assume that the trader decided to hedge the position and opened a short position in the EUR/JPY pair at the time the long position was established. The adverse movement in the EUR/USD is now offset by a positive movement in the EUR/JPY, and when the profit on the short position covers the loss on the long position, both positions are closed. This is an example of how forex hedging can be used to reduce or control losses.
Forex hedging has its proponents as well as its opponents. You can find Hedge EA – Forex Robots that use forex hedging principles here. A standard tester is unable to test all hedge EAs, because multicurrency testing is not supported. However, we have developed a special tester for hedge EAs testing, which comes with our Hedge EA.
As a result of new NFA* rules that forbid hedging, our company has developed a supplementary module  which allows users to copy lock transactions in an additional account (locking is opening orders in the opposite direction on a given currency pair to reduce losses). If your expert advisor or your trading strategy uses lock positions, you can use this tool to continue trading with your broker as you have in the past. You need only open an additional account with your broker.