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What is hedging in Forex?


John Baldock

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Hedging is a term used to describe a strategy that protects traders from adverse movements in currencies such as the USD/CAD pair. A trader might have bought a position in CAD/USD and now wants to protect himself from the possibility that the value of the Canadian Dollar will fall. He can do this by selling some of the CAD/USD position in anticipation of the drop. This is called hedging because he has taken out insurance against the possibility of losing money.

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Hedge in this case is to try to reduce potential losses. A good way to do this is to open a second trading account and set up a strategy to lock in profits so you are not trading with your money. You can do this automatically with a demo account since they allow you to trade with fake money, this way you do not risk capital. I typically close out the trade after making a 5-10% profit in whatever direction and then switching to the other side of the trade in my main account. If you are going to try hedging I suggest you do it on your first trade, this way you cut down on the amount of time you are exposed to risk in the market.

Edited by mkht4432
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