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Movements of market prices are very unpredictable, no doubt! And it is assured that volatility of market declines unexpectedly anytime. To prevent from the negative impacts of declining volumes of transactions any time, Hedging is the solution. It is beneficial for the forex online trading to mitigate the risks of losses or to protect their commodities to lose. It prevents your business against any uncertainties in prices. Before moving forward I would like to clarify the term ‘volatility’ which is measured in terms of price movements relative to time in the world most leading Currency pairs. Basically, most of the companies using the concept hedging to negate the risks that may occur while trading which follow the set of rules as declared by the International Financial Reporting Standards (IFRS). Moreover, hedging works completely on predictions. So to make future assumptions, there is a need to observe the market’s volatility first for taking any decent decision to approach hedging. What hedgers do is, they simply fix the future price at which they are going to sell or buy the trades and wait for that future time in which either you see appreciation or depreciation in the prices. This not only brings in a profit many times but also tries to make a great reduction in the losses (if you are to face any loss). It would not be wrong if I say hedging is a tool by which a loss at present might look like a profit since it will be compensated by greater profits in the future. This is the article which focuses on hedging so that Forex traders are aware about the concept of hedging which would help them to cut in the losses. There are different types of hedging. At the very first, let us discuss about direct hedging. It takes place when a trader places an order to buy any currency and a sell order to sell another currency at the same time. This way of trading scenario might give a nil profit but for sure it would compensate your losses since the time when one trade goes against your predictions, another trade may definitely go in your favor. The other hedging type is complex trading. It takes like when a trader hedges against a particular currency by trading two different pairs. Like for example, a trader places a long trade on USD/EUR and short trade on EUR/GBP. Hence if Euro appreciates then he/she could be affected for both currency pairs. Hedging works mainly around these four components: • To analyze risk exposure. • To determine risk tolerance. • To determine priorities of risk strategies. • To monitor hedging strategies. It would be recommended for you to first develop your trading plan, strategies and of course your management approach and then apply hedging if its really fits into your trading condition since it is not guaranteed that hedging always proves profitable to the forex traders . Yes, to some extent it actually postpones the outcome of bad trade, but it is also true that you are delayed to take out the profit you earned from your good trades. At last I would like to conclude that hedging techniques are not that much straightforward as it seems to be. So expert’s advices should be welcomed for the better understanding of the concept of hedging. This can definitely help you use the techniques of hedging effectively in the forex market. So Good Luck guys, Happy earning with never ending learning process!
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