Currency Hedging and Other Risk Management Strategies
We’ve discussed currency hedging and why it is so important in the past. With the United States going into trade wars with different countries, the rapid changes affecting the world’s economy, and events like Brexit looming, managing risks and protecting your investments becomes even more important.
Fortunately, the forex market offers plenty of room for meticulous risk management, among which is through the use of currency hedging. In this article, we are going to focus on this risk management technique and other strategies you can implement to protect your investment.
One of the first things you can do when managing risk in the forex market is sizing your open positions correctly. Rather than worrying about losing a lot of money over a short period of time, you need to worry about your risk profile and how your trading strategy matches that profile perfectly.
For example, you need to leave enough room in your Stop Loss in order to remain flexible in the market. You also need to think about the Target Profit you are aiming for compared to the Stop Loss you set for the position. Indicators and systems found on Wall St. Nation forex reviews can help you identify the suitable TP and SL based on your risk profile as well.
More importantly, you need to adjust the size of your positions based on your margin. Unless you have the margin to back it up, opening 1 lot trades every time is not the best strategy to use. Trading full lots with only $100,000 in your account leads to a massive risk with every position you open.
Hedging is the most common risk management strategy in forex trading. Hedging basically means protecting your current positions from market turns, leaving you with less risk to deal with. When used correctly, hedging can keep you profitable even in the most challenging market conditions.
There are two types of hedging to use: complete hedging and partial hedging. Complete hedging means freezing your position completely by opening a new position opposite to your existing one. You still have to absorb the spread as a potential loss, but that’s the limit of your risk.
Partial hedging, on the other hand, allows you to freeze only a portion of your loss. This is the strategy to use if you expect a reversal immediately after the big turn, or if you simply want to be more meticulous with how you manage your risks.
The third strategy we are going to discuss in this article is known as averaging. Let’s say you buy EURUSD at 1.3450, and the market turns towards 1.3200. Opening another Long position at 1.3200 means you will now break even at 1.3325. That’s an easier target to reach compared to 1.3450.
Averaging is effective during bigger leaps, especially when you are sure that the market will correct itself. You can lower your break-even point substantially with multiple averaged positions too, but don’t forget to monitor your margin to avoid getting margin-called early.
Combining these risk management strategies will make you a more profitable forex trader in the long run. An improved understanding of your risk profile and better risk management in general will also help you avoid unnecessary losses during unexpected market events.