As a novice trader, many find it difficult to learn how to remain calm and collected. And it is often the psychological factor that plays a decisive role in opening or closing a trade. Greed, fear, overconfidence, a lack of sense of proportion – all this can lead to a zero balance.
All novice traders at some point conclude that they must find a way to put up with losses or compensate for them. Trying to find a solution to the problem most of them turn to Forex hedging. In fact, this is one of the surest ways to protect your funds, and it can lay the foundation for a very successful trading strategy.
The term itself comes from English. A hedge is a kind of fence. Accordingly, the term hedging in the forex interpretation means building a “fence” against risks.
Hedging is a trading strategy that involves opening a trade position in one segment to offset risks in another. The principle behind this behavioral strategy is that of opposite trades. Naturally, proponents of hedging reduce their profits, however, they are well protected from big financial losses.
Trying to figure out what Forex hedging is many people start comparing it with a stop-loss. In a way, strategies based on these concepts are largely similar. However, if you have used a stop-loss in trading at least once, you probably know that the behavioral strategy has its drawbacks:
An undoubted advantage of hedging is that trades cannot be closed automatically. Furthermore, the trades are opened in such a way that one asset can compensate for the loss of the other and vice versa. This strategy allows traders to make their trading more flexible and rational.
If you understand what Forex hedging is and the benefits of a strategy based on it, we suggest you get acquainted with the following trading stages:
Entering the market (buying or selling).
It is important not to use a stop loss!
Opening a trade position in the opposite direction.
It is advisable to use the same platform.
Having opened two trades, you will clearly see how the profit from one trade compensates for the loss from the opposite one.
Experienced traders do not recommend using this strategy all the time, as it produces minimal profits. However, if you are new to the financial market and have just learned what Forex hedging is, you can safely utilize it for a few weeks. This will allow you to put into practice what you have learned while being under real market pressure. After all, training with a demo robot does not allow traders to go through the entire range of emotional experiences, such as losses of their own funds.
Some smart traders have honed their hedging skills to perfection and work only with large lots. They earn big profits with minimal risk this way. Most of them use this strategy when they are in an unstable emotional state and would like to take a break from trading.