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Beginner’s Guide

Hedging and Averaging in FX

Hedging and Averaging
Hedging and Averaging

There are a number of methods that can be used in forex – and any method that involves the execution of the market involves a lot of risks. FX is risky, no matter how professional of a trader you are. Most brokers will close your trades at certain levels to minimize risks of losing all your deposit – often referred to as Margin Call.

There are methods that can be very beneficial like hedging and averaging techniques. Hedging is simply opening the same currency pair in opposite trading positions. The idea of hedging is when to minimize risks without cutting losing positions. This strategy is mostly used by traders who do not want to use the Stop loss – this keeps your loss amount at a constant range, it locks it up.

Example

A trader might decide to Buy EUR/USD (LONG – based on ASK), should the market go against the trader (downwards), the trader then decided to Sell EUR/USD (SHORT – based on BID) with the same lot size, to lock the losing position at a particular negative point/s.

Your loss will be locked at those negative points/pips no matter where the market decides to go. Spread charges may apply depending on your broker.
So if your losing position is at -10 pips, the winning position will maintain the -10 pips no matter where the market goes (locking the losing position)

Hedging is recommended when you know – a way forward when you have locked your losing position. If this doesn’t work well for you, there are a number of techniques to try out like Averaging.

Averaging, just like with hedging it minimizes risks. Averaging is simply a technique used by traders by opening two positions of the same currency pair in the same direction but at different price levels.

Example

  • Buy EUR/USD1 lot at 1.0300 (The market goes down by 50 points)
  • The trader now suffers a floating loss of -50 point
  • To minimize the risks the trader decides to use the Averaging technique.
  • The Trader Buy EUR/USD1 lot at 1.0250

In this scenario, there are two trades open.

  • Buy EUR/USD 1 lot at 1.0300 (-50 points)
  • Buy EUR/USD 1 lot at 1.0250 (0 points) assuming there are no spread charges

Now in this scenario let’s assume after some time, perhaps after 2 hours, the market moves up to 1.0275 – in this case the trader would have 1 trade at -25 pips, and the other at +25 (1.0275 is known as the BEP level) BEP – is known as BREAK EVEN POINT in the forex market on both trades.
Should the market go any higher the trader will then in return make a profit.


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