Hedging as it applies to the forex market and trading, at its most basic form, is a strategy to protect you from losing big in a certain market position. There are many types of hedge that move from the very simple, to the more complex if you are an advanced trader, but the premise is the same. To protect your position in one currency pair by placing a trade within that same market in the opposite direction.

The Fundamentals of Hedging in Forex

The first point to note is that hedging is not always permitted by all brokers. Therefore, you should check their policy first. As mentioned, the majority of traders who engage in hedging are doing so to provide themselves with a form of protection in the event of adverse market changes. By nature, hedging is particularly common in times of market volatility when the movement is quite unpredictable.

Hedging in the forex market is also more common than in many others. This is often due to the fact that the forex market can be seen as slightly more volatile than many others that are traded. As a forex trader, there are several types of hedge that you can place to protect your position in the market.

Forex Hedging Strategies

While there are a range of hedging strategies available that vary in complexity, here we will outline some of the most common you can utilize depending on your broker policy and level of experience.

Simple Forex Hedging

This strategy is also known as direct hedging. It is one of the most widely used, and easy to understand hedging strategies. Direct hedging occurs when you open a position to buy (or go long) on one currency pair. You then open the same position to sell that currency pair (short).

There may be a number of reasons for doing this, but in any case, a few things happen. You now have two open positions in exactly the opposite direction. Although you do not make a profit on the actual hedge itself, it does allow you to keep your original position. This means you do not have to close your original position for a loss, and can instead start to make money through your short position. Maintaining the original position also means you could again profit if the market trend reverses.

Multiple Currency Hedging

Moving into one of the more complex hedging strategies. If you are trading in multiple currency pairs, then this strategy could be effective to a certain extent for you. Multiple currency hedging takes place when you but a long position, and a counteracting short position in one of those currencies.

For example, you may take a long position in the GBP/USD market, and a short position in the USD/JPY market. In this example, you are protected against your USD exposure to a high degree. This strategy though does not cover movements in the other currencies you are exposed to though. In these cases, if the JPY, or GBP were to fluctuate, you would still be exposed.

A variation of this strategy also sees traders take long and short positions in currency pairs that are positively correlated, meaning that if one currency pair goes down, the other will go up. Such an example of these positive correlated pairs may be the GBP/USD, and EUR/USD. So, if you hold a buying position in one, and selling position in the other, in theory, they should offset. Still though, this is not as exact a strategy as a simple direct hedge.

Forex Options Hedging

An option in forex is an agreement to exchange at a specific price in the future. It is a common instrument used by forex traders who wish to hedge their position. Again, this is referred to as something of an imperfect hedge since it can still result in some losses for you as a trader.

Using an example of how you may buy a forex option to hedge your risk, consider the following:

You have gone long on the EUR/USD at $1.08 expecting the pair to go higher. You are now concerned though that it may fall further on the release of economic data coming in the next few days. In order to mitigate this risk, you may but a put option with a strike price at something like $1.07 on the pair, and an expiration date of the option at some point beyond the data release.

If the pair then does go lower, the trader is paid out on their option based on the contract conditions set. If the news does not materialize, and the pair continues to go higher, then the trader can continue to hold their long position and will have only lost the premium set out in the option contract.

Who Hedges Forex and is it Worth It?

While only you as a trader can make the decision on whether hedging is worth it, the benefit of engaging one of the strategies mentioned here is that you do limit at least some of your exposure in the markets you are trading. Timed right, it can also put you in a more profitable position.

The question of who hedges in forex is more complex, but generally speaking, as long as the forex broker you are trading with allows hedging, then there is nothing to stop you from doing it. It is important that you understand why you are hedging and how you want the market to react but beyond that, almost all levels of trader can get involved with at least some of the strategies above.

Forex Hedging Fees and Costs

There are no direct fees related to forex hedging, but depending on your broker, you may have to pay a commission or spread on the market you are trading. This, as well as any other fees like a swap-fee if you are keeping the position open, are some other important things to factor into your calculations when determining if you should try hedging in forex.

• Rate has doubled from Previous Weeks Record
• Record High is worse than Analysts Predicted
• EUR/USD Slides Again as Oil the Only Positive

US unemployment rate figures just released make for very grim reading. A hammer blow to start Thursday, the figures show that more than 6.6 million Americans filed for unemployment benefit amid the ongoing COVID-19 crisis. These numbers more than doubled the already unprecedented record of 3.3 million jobless claims from the previous week. The market has been somewhat slow to react to this news, but remains poised for the jobs report to be released later today.

New and Unwanted Records Being Set

Last week’s unemployment numbers of 3.3 million were far beyond the previous record high set in 1982. The number was almost 10 times greater than that set almost 40 years previous. The new weekly number from today puts that even further into the shadows. These are unprecedented times of difficulty throughout the US and global economy which show little sign of let up at present. At the time of writing, the Dow Jones was trading 150 points lower on release of the news which sees more than 10 million people in the US now filing unemployment claims in the past two weeks.

Some solace can be found in the fact that the latest $2 trillion stimulus package has made it easier for workers who have been furloughed in the crisis to remain on unemployment benefit, and also expanded the scope of those who could apply for the benefit. The previous high of 695,000 claims in 1982, and the 665,000 during the previous financial crisis of 2009 now seem miniscule by comparison.

Numbers Outpace Expert Prediction as Euro Falls

Analysts had predicted that numbers would should a marked increase. The results though, have gone far beyond even what the most pessimistic of onlookers imagined. This movement looks set to continue with more labor data to come on Friday. This government data release is set to show more huge losses across the board.

The forex market impact is already being felt as the EUR/USD market fell back below the $1.09 mark. The currency pair had worked hard over the previous week to build back up significantly, but on release of more negative data from the US, it has given way to the continually increasing safe-haven role of the greenback.

Oil Rebound Provides Glimmer of Positivity

At the opening bell, the one positive to garner from the start of the day comes from the news that the price war between Russia and Saudi Arabia may be nearing an end. Prices rallied across the oil markets more than 10% on these hopes. Nothing has been ruled out and there hasn’t been any concrete word besides an offering on Wednesday from US President Trump that the two sides would “work it out” in the coming days. This news would appear to have some truth behind it and has bolstered the market from record low levels.

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• JPY Posts Steady Gain to Start the Day
• Other Asian Markets also boosted
• COVID-19 Cases Increase to Make US Global Leader

Currencies and markets in Asia got Friday trading off to a positive start. Figures coming from Tokyo saw inflation easing to 0.4% for March. This, and the news that US cases of COVID-19 have now surpassed those of China, helped strengthen the JPY which has posted gains of more than 1% on the day against the US Dollar. Both the NZD, and the AUD, often traded as a proxy for the Chinese Yuan also posted increases.

This comes as confidence starts to return to the Chinese market, even though Beijing has now temporarily closed the country to all foreign visitors to prevent the spread of imported virus cases.

USD/JPY Improving From Low Point

Gains from the Japanese Yen against the USD during the Asian trading session on Friday have brought it back from a several week low point. Although the currency still remains under some strong selling pressure, this has been lightened by positive data released from Tokyo, combined with an easing of the USD safe-haven status from what it had been in the previous several days.

The JPY itself is a well-known currency that traders usually move to during times of uncertainty, though this had been rocked in recent weeks with the market turmoil present across Asia and the world. Stimulus hopes though, particularly in Japan, as PM Shinzo Abe prepped a $135 billion package for approval, have managed to thoroughly boost trader confidence. The Nikkei bounced back with a gain of almost 20,000 points Friday to reflect this.

Positive Ripple Felt Across Asia

While Japanese markets posted some of the biggest gains, there were rallies across the region. These extended to Shanghai and Hong Kong both posting positive numbers as the Asian economy looked to regain stability following a torrid period. Analysts are predicting a further push from these markets next week as they look to get ahead of US markets that are currently predicted to open lower after large gains on Wall Street yesterday.

The continuation of this positive trend will likely hinge a lot on news coming from China in the coming days and into next week as it continues to get back to work following the protracted shut down.

US Markets May be Shaken by Increased Case Numbers

With news coming today that the number of US COVID-19 cases has now overtaken that of China, traders wait to see how both the stock, and forex markets will respond. Traders were not deterred by huge unemployment numbers posted yesterday, but experts are predicting a slowdown to end the week with markets projected to open lower.

This comes after a significant rally saw the S&P 500 climb more than 6% yesterday. This could also prompt a further move away from the USD as traders look to other options for safety.

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	- #1 Broker in USA - Canadians Welcome - Over 80 Currencies - Regulated by NFA, CFTC, FCA, FSA, IIROC & CIMA - Member of the National Futures Association (NFA# 0339826) Click Here to Visit Forex.com
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