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The Uses and Benefits of Hedging in Forex Trade


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Hedging is a tool which is often used by lots of traders in order to avert losses by way of diversifying the investment portfolio of a trader. While not recommended for newbies, it is a widely known tool for averting losses. In order to understand better the benefits of hedging, scroll down to read the comments below:

 

 

1. Get rid of all Risk in Long Term

 

If you are based in Britain and trade on the currency pair of the US Dollar and the Pound, then you would eventually want to buy off the shares and stocks of well-performing companies in the UK. Thus, your trade would be hugely dependent upon the existing rate of exchange between the Dollar and the Pound. However, this exchange rate will keep changing over time owing to the various economic-political developments which are bound to take place over time. Due to this reason, there is a need to hedge the currency risks to gain in the long term.  (Points from CornerTrader)

 

2. You can diversify Your Portfolio

 

You would gain a lot from diversifying portfolio, which as I mentioned at the outset is one of the main reasons why people like to engage in hedging. The emerging markets are attractive to investors who would wish to risk more and achieve higher returns. Since a majority of investors make use of foreign-based investments, they reduce their exposure to risk making use of currency-hedged mutual funds.

 

3. You Get to Hedge by Using Forward Contracts

 

A lot of exchange-traded funds use forward contracts in order to hedge currency risks and these contracts can be purchased by almost every kind of major currency. A forward contract or currency forward, enables the purchaser to lock in the price that needs to be paid in exchange for a currency. To describe in other words, the exchange rate is frozen in place for a particular period of time.

 

However, buying forward contracts comes for a price. The contract protects towards the portfolio value if exchange rates were to shift in order to make the currency a little less valuable than before. Let’s take the United Kingdom as an example. Here, a forward contract acts as a protection to an investor when the pound’s value declines in relation to the dollar. On the contrary, if the pound’s value were to increase, one would really not require any forward contract. So this is actually a double-edged sword to be honest.

 

People, who frequently use currency hedging, do it out of faith that the cost of hedging will pay off over time. The fund's objective is to decrease the currency risk and get used to the additional cost of purchasing a forward contract.

 

4. Hedging Acts as a Shield

 

A currency hedging strategy will act as a shield for the investor in case the value of a currency was to see a sharp drop. Suppose that there are two mutual funds which are made up entirely of Malaysian-based companies. One of the funds fund do not hedge currency risk. But the other fund, while it contains the exact same portfolio of stocks, but buys off forward contracts on the Malaysian currency, the Ringgit.

 

All the above are reasons why hedging is necessary. Political and economic factors would be able to find huge fluctuations in the rates of exchange. In a few cases, currency rates are normally quite volatile.

 

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I don’t know about others, but I absolutely hate hedging because it’s just not sensible thing to do unless there is whole lot logic to it, but I am not sure there can be major logic behind hedging. I keep it rather easy and simple and that’s with using simple strategy not complicated one. I am able to work out everything without any restrictions at all thanks to http://alpari.com/, as they have low spreads, high leverage, massive cash back and complete freedom to do whatever I wish.

 

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It’s crazy to argue over this but given my person opinion only, I will say it’s crazy to go with stuff like hedging because that’s just not going to work in our favor at all, so that’s why we need to be very sure and wise with how we go about handling things. I work with OctaFX broker where I get great advantage and that’s through the top notch features and facilities present starting from 0.1 pips to high leverage up to 1.500 while there is also massive rebate scheme present which is up to 50% and is even for losing trades too, so that’s why I like it so much and I am able to enjoy working with them and it gives me extra confident to handle any situation.

 

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indeed the character of the trader is different, and of course to be better able to take advantage of market movements. scalping can benefit in utilizing market news, the results can also be maximum

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  • 2 months later...
Guest Steve Goodwin

Not only hedging trading style but also I avoid all of complicated materials in my live trading! Simplicity is the best method of Forex trading, instead of hedging I am interested on all kind of trading styles from scalping to swing trading! By the way, regulated broker trade-24.com allows all of trading styles including hedging, even here I can use any technical tool (indicator, EA, software etc) with enough freedom, that’s really awesome experience!

 

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  • 4 weeks later...

Hedging is a practice every scalper should consider. There is no fighting that portfolio confirmation is much of the time comparably as key as portfolio appreciation. Like your neighbor's obsession, in any case, hedging is examined more than it is cleared up, making it seem similarly as it has a place just with the most subtle budgetary spaces. I am a binary options trader and in options trading I do not like it. I like lxmarkets.com as my trading platform as it is a leading options broker.

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