Hedging is one of the oldest practices used by forex traders to protect them against market shocks. This practice is borrowed from other business sectors and applied as a form of an insurance plan against unexpected price changes in the forex market. Hedging is a great strategy to use whenever a trader is expecting volatility and uncertainty in the market.
There are a number of ways hedging can be applied by traders to not only protect them from shocks but to also earn them some profit. The strategies are however quite complex and require keen attention in order for them to work. Generally, hedging is done to partially or fully cover a trader from risk. Before getting into how hedging can earn a trader profit, it is important to know how it works to mitigate risks.
Hedging To Mitigate Trading Risks
As a general rule, hedging is a form of investment that requires the use of assets to secure other assets. For a trader holding some funds in the forex market, hedging would mean that they would have to spend in order to gain security. As such, the trader needs to know which currencies to hedge by trading off with other currencies.
Earning Low-risk Profits Through Hedging Strategy
Hedging forex strategies often work with particular pairs of currencies that a trader already holds. The three most common methods of hedging to make profits are:
- The Sure-fire strategy.
- Martingale strategy.
- Double Martingale strategy.
1. The Sure-Fire Strategy
For this strategy, the trend of the market determines how a trader will hedge. If the market trend in a particular trading session is moving upwards, then the trader hedges below the trend and sets take-profit positions further up. In case the trends continue, then the trader will make profits as long as the hedge position is not triggered. The Stop-loss hedge positions are placed in the converse direction and they mark the positions where the sell trigger will be activated. The trader thus continues to make a profit if the trends prevail.
2. The Martingale Strategy
This strategy also works on the premise of price trends. A trader manipulates the market trend and uses Stop-loss and Take-profit to determine each successive hedge position. Just like the Sure-fire strategy, if the trend in the market prevails, then the trader has a chance of making profits. The Martingale strategy employs two or more lots. The uniqueness of this strategy is that after a stop trigger has been activated for one lot, the other lot is activated and thus covers any damages that the initial lot would have caused.
3. The Double Martingale Strategy
This strategy is similar to the Martingale strategy with the only difference being that both lots start at the same time and only stop when one has hit the stop loss. One of the lots is a buy lot while the other is a sell lot. In case the market price continues to change, then either one of the two lots can make profits faster than the other lot makes losses. Hedging is generally a risky mode of making profits. Just like other strategies, experience and proper insight are needed to gain profits.