Hedging in Forex

[Rihan]

Hi there, I hope someone could help by explaining to me how hedging works in forex.
I googled it and searched all over, some sites really try to explain it in baby language but I'm either too thick to understand or....
Could somebody please explain to me with examples.
I understand that one buys and sells a currency at the same entry level, I tried it on a demo with lots of monopoly money but it does'nt work...Does it only apply to certain currencies.
Any help would be appreciated..
Ta

 

[trader_dante]

It all depends what you want to do.

Lets assume you were doing some work that meant you would be paid X amount of dollars in six months time. If that was the case you might want to SELL USD futures. As a result of this, if the dollar fell sharply in six months time, the gain you have in your futures account would offset the lower wage you are paid in dollars.

 

[Rihan]

Hedging confusion

Thanks for the replies guys, someone told me that this system had merit to it.They were obviously wrong.Full stop.I have been trading on a demo acc for 5 months now, finally reached the stage where my losses are minimal.I have developed a good trading strategy using Bollinger bands, the Macd and Rsi.
I am waiting for my real account to be opened, so that I can experience the pschycological factor of trading with real money.
Just looking for all the tips I can get.
Ta

 

[Rahul1982]

No, you're not being thick. If you buy and sell the same currency at the same level you are what is called 'Flat'. You have no position. Even worse, you will probably have to pay the spread to get in and out, thus locking in a guaranteed loss. Anyone who tells you there is some merit in doing this simply doesn't know what they're talking about. Full stop.

Now, if you tell us what you are actually trying to achieve, maybe there's a better way to get there. Will do my best to help.

GJ

It's does works mate . I do it all the time . It's just a long term thing and u have to be patient . If you need to now get back to me . I'm doing it on demo account for 2 months just to be sure and have made 6500 in last 2 months . I'm also learning I just want someone to prove me wrong

 

[adeelyaz]

everybody do hedging in trading so i also do this many time here in forex trading.I have been trading on a demo acc for 3 months now, finally reached the stage where my losses are minimal.I have developed a good trading strategy using Bollinger bands and every day i am increasing my knowledge.

 

[Rambo35]

Hi there, I hope someone could help by explaining to me how hedging works in forex.
I googled it and searched all over, some sites really try to explain it in baby language but I'm either too thick to understand or....
Could somebody please explain to me with examples.
I understand that one buys and sells a currency at the same entry level, I tried it on a demo with lots of monopoly money but it does'nt work...Does it only apply to certain currencies.
Any help would be appreciated..
Ta

You do not hedge by entering a long and short at the same level and as GJ mentioned you are guaranteed to lose. Those who enter a long and short at the same level should not enter at all.

 

[Pferd]

You can enter a position in one direction and cover your potential losses with an option in the opposite direction. In fact, the people trading shares in big volumes do this often.

It is not a straight 1:1 hedge but should help you to at least to cut your losses. Bear in mind that many variables affect this strategy, such a expiration of the option, cost and of course the time frame you trade. If you are a very short term trader might be cheaper to take a trade two times in the same direction and get losses in one of them than buying an option.

This strategy only works if you have clear the potential/supposed direction of the trade and you want to cover against either you being wrong in your assesment or something unexpected going against you.

You can of course also open a position in one pair in one direction and a similar pair in another direction. Very complicate strategy but could eventually work if you know what you are doing.

But to open two positions of the same pair in opposite direction just for the sake of it with the hope that somehow you will be able to profit in the ups and downs is a waste of time and money in my point of view. You need to be really sharp in your assesment at the time of closing the first position. It is not impossible to do but there are, in my point of view, easier ways to do this.