Hedging techniques benefit traders to lessen risks and guard their trading accounts from having losses. Discovering the best strategies in hedging is a good way to profit in the forex market.
A decline in May 2010 occurred when the US markets tanked with Dos dropping over a thousand points. This is now called the flash crash.
The same decline in the global markets took place in January 2015 when the SNB or Swiss National Bank untied the franc from dollar. The move was surprising because no one expected that event.
Those unanticipated events weren’t ordinary but when they took place, investors and traders lost billions. Unlike other major happenings like global elections, events like these are unpredictable and need proper risk management techniques in expectancy for such happenings.
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A good tip to lessen the risk is by hedging. It is the practice of minimizing the risks by initializing several trades and taking advantage from the spread between the loss and profits. Below are some of the best hedging approaches that you can utilize.
Initializing Two Trades with Similar Security
Opening two trades with similar symbols is a safe hedging strategy to lessen the risks in the market. For instance, suppose that the pair of EUR/USD is exchanging at 1.1200. After analyzing, you discovered that the pair could increase 10 pips and attain 1.1210; thus you decided to sell half a lot of the pair. If trade goes right, your larger buy trade will be lucrative, but the smaller sell will make a loss. In this event, your income will be the spread between your profit and loss. On the contrary, if the pair drops, your larger trade will make a loss that makes up for the gain on the smaller trade.
Exchanging the Safe Havens
Some currencies and securities are considered as safe havens. The supposition is that traders have a tendency to move to them when risks arise. The JPY is known as a haven for its immense external treasuries that the Bank of Japan possesses overseas. It is the second biggest holder of US treasuries next to China. This is the reason why the Japan Yen still gains even when North Korea fires Japan with missiles.
Another way of hedging is to relate the idea of correlations. This idea arises because of the different relationships that occur between various assets. Carefully linked assets move in similar directions while inversely associated ones move in the opposite way.
Imbalances in the currency make good opportunities for hedging. An easy manner of finding correlations between securities is to seal their closing prices in the MS Excel and perform a function of correlation.
Arbitrage is a type of correlations trading wherein the traders take advantage from the securities’ related movements. There are several kinds of arbitrage opportunities utilized by the traders to hedge against risks, namely the merger arbitrage, statistical arbitrage, risk arbitrage and triangular arbitrage.
Hedging is a good method to regulate losses in the forex market. It is because a trader who initiates one trade which is not hedged is always open to the downside risks. However, hedging needs a lot of practice to perfect it.