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Written by: PaxForex analytics dept - Monday, 17 December 2018 0 comments
The possibility of hedging through Forex trading has always aroused the interest of a wide variety of traders, both more experienced and just beginners. It is known that all sorts of hedging strategies are often practiced by many institutional Forex participants:
• subjects of foreign economic activity;
• investment funds;
• financial companies;
This circumstance, in turn, causes the fact that hedging is becoming very popular with private Internet traders who make Forex transactions “remotely” through Forex brokers who provide qualified intermediation services for Forex trading.
It is believed that the use of hedging tools by private traders in the practice of regular Forex trading contributes to break-even trading on Forex and thus increasing the likelihood of completion of most Forex transactions with a profitable result. This statement, of course, is quite controversial, since the experience of Forex trading, accumulated over many years, suggests that unprofitable transactions at Forex inevitably accompany profitable, which casts doubt on the very possibility of trading forex in break-even mode.
Hedging - economic practice
In economic practice, hedging is used in the context of preventing or minimizing the negative consequences of the occurrence of force majeure, unforeseen circumstances.
Very often, hedging is used by all sorts of economic entities to insure certain trade transactions against price fluctuations that are unfavorable to them, which the parties to the transaction may not be able to foresee and take into account.
Hedging in Forex Trading: "locking" positions
In Forex trading, hedging of exchange rate risks is often used in the form of the so-called “locking” of Forex positions, which, as we know, is a kind of alternative to the use of protective orders on Forex (for example, stop-loss).
For example, an online trader has opened a Forex position to buy with a certain lot size. It is usually recommended to set a stop-loss for such a Forex position that could in some way limit the losses on this transaction in case the course moves in an unfavorable direction for the trader.
If the trader is convinced that there is only a small correction on the market and not a global reversal of the current trend, he can set a pending order to sell with the same volume and exactly at the same level at which the stop-loss could be positioned. Such a maneuver will allow the Forex trader to fix a possible loss in any course movement. When the correction of an uptrend relevant to the market is completed, the sale transaction must also be completed.