Hedging Strategies in the Forex Market
A trader who enters trading in the forex market in order to protect his position in other portfolios can be said to be hedging. Or protect its position from fluctuating currency exchange rates. Simply put BUY on a pair then do SELL in other pair or other portfolio like spot contract and forex option. Utilizing the hedging strategy in the forex market correctly, traders can minimize losses from the fluctuations that occur.
The main method of hedging for retail forex traders is through Spot and Forex Options contracts.
Spot contracts are contracts commonly used by retail traders for hedge. Because the spot contract has a short-term (two-day) due date, although this spot contract is not the most effective ‘hedging’ vehicle.
Another with the forex option is one of the most popular hedging methods. The buyer forex option has the right, not the Obligation, to buy or sell the pair at a certain level or exchange rate at any time in the future. Commonly used option strategies such as long straddles, long strangles and bull or bear spreads, to limit potential losses from transactions.
A hedging strategy is developed in four parts, including analysis of forex trader risk exposure, risk tolerance and preference of strategy.
You must identify the type of risk you take in an open position (current) or position that is still in the plan. You also have to identify what implications when taking risks for not hedging, and determine the amount of risk in the forex market.
Determine the risk tolerance
In this step, you as a trader must have your own risk tolerance level, to determine how much risk a position needs to be dihedging. Each transaction will never have zero risk so that the determination of risk tolerance is left to the trader.
Determine the forex hedging strategy
If you use forex options for the risk of hedging forex transactions, you must determine which strategy is the most cost effective.
Implement and monitor the strategy
By ensuring that the strategy works as it should, the risk will remain minimized.
Forex trading is one of the investment portfolio at risk, and hedging is one way that can help traders to minimize the amount of risk they are able to take. However, not all retail forex brokers allow for hedging in their platforms.