Hedging

Hedging is viewed by Forex traders as a strategy to protect themselves from considerable losses. It helps minimise risks and insure against unexpected market movements.

When entering a direct hedge you simultaneously open Buy and Sell positions for the same currency pair(s) with the same volume thus, lowering the risk of losses but not eliminating it. With both positions open, a Forex trader may profit on them depending on what direction the market takes. If the market moves against the first trade, countering profits may be made on the hedge but the market situation must be monitored closely to ensure a timely close and thus a successful hedge. 

Hedging is often used by traders new to Forex who wish to negate insofar as is possible the risks associated with Forex trading however, a more complicated variant of hedging is also possible. It involves two different currency pairs to hedge a particular currency being on the other side of both pairs thus, if you wish to hedge GBP exposure, you open different trades in opposite directions: going short EUR/ GBP and going long GBP /CHF.

Hedging can also be used as a supplementary strategy in ECN trading.