Forex Hedge Trading
Your site has been a great source for self improvement for newbies in forex like myself.
I have learnt about hegde trading and i am not really clear as to how to use it and how to profit using a hedge trade.
Please educate me on the hegde trading system.
The ultimate goal of hedge trading is to never have losses. This is achieved by opening two simultaneous opposite positions either on the same currency pair or on correlated pairs.
For example, what will happen if Buy GBP/JPY and with another order Sell GBP/JPY?
Your net total will be zero, no matter which way the market goes.
(You still, however, need to pay the spread for each open position and also there will be rollover charges if you keep orders over next day – all this at your own expense).
There are various hedge strategies being used in Forex. Let’s review those we know:
1. Profiting on rollover:
If you check with your broker, you’ll find that there are currencies that are credited positive rollover each day (when you Short or go Long specifically). Hedge traders are interested in working with such pairs in order to collect rollover profits every day.
The most popular and profitable pair for capitalizing on rollover is GBP/JPY when bought.
The strategy hedge traders apply is: they use 2 brokers, where one broker is charging rollover each day and the other doesn’t charge any rollovers. Then traders open Buy order for GBP/JPY with a broker who pays rollover, and thus collect daily rollover profits; and simultaneously open a Sell order with another broker that doesn’t charger rollover (when GBP/JPY is Sold the rollover each day is negative, that’s why it is important to have a broker who want charge rollover). In total, hedge traders end up with BUY and SELL orders for the same pair, which cancel each other, hold positions for indefinite time and earn positive rollover every day.
2. Hedging with correlated pairs:
Some currency pairs have strong correlation. More on correlation here: http://www.forexmarkethours.com/correlation/06/
In simple words, there are currencies that mirror each other as they move.
For example, if you look at charts of EUR/USD and USD/CHF pairs, you’ll find very close similarity in the graph patterns (in fact the effect will be that EUR/USD is moving inversely to USD/CHF).
What does it mean to hedge traders? It means they can use this similarity in moves to try to cover up losses and built a hedging strategy that would combine those two currency pairs.
Since EUR/USD and USD/CHF move inversely one can BUY both pairs. The result again will be – one order will gain profit, another will go in loss, they’ll cancel each other.
Then you may also add mechanism of closing profitable trades and rollover and work out a profitable hedge strategy.
Would you like to add your own comment or ask another question?
Discussions speed up learning. Let's talk.