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Tuesday, January 5, 2010

Making Money With Forex Hedging

By James A Jackson

In the world of Forex trading you are likely to hear the term Forex hedging frequently. While the concept may seem simple, it can be somewhat intricate in the methods. Essentially Forex hedging is the process of buying and selling a currency pair to protect the investor from a change in the exchange prices.

By practicing a method of forex hedging, a trader can protect the position of a currency pair from the risk of a fluctuating rate. There are several diverse techniques and methods that traders use to help secure their trading position. These include complicated hedging, multiple currency pairs, and forex options.

The hedging strategy is used by Forex traders in one of two ways. When a trader is facing a negative price on a currency pair, they can predict that a loss may be on its way. Let's say the negative price is on a dollar to euros currency pair. To offset the potential loss on that pair the trader sells a dollar to yen currency pair.

This will of course be based on the position of the dollar within those two pairs, but the idea is to offset potential loss. By using the positions of the dollar, long and short, this is a hedging strategy.

Traders can also use a differing interest rate between two diverse forex brokers as a hedging method. The scenario look like this: one dealer charges interest at the end of the day, the other dealer does not. The trader will open a position on the exact same currency pair with both of them.

When the end of the day comes around, if the currency has not performed very well, the trader will pay interest to one broker and earn the rollover interest from the other to offset. But if the currency pair does well, then the trader will profit from both brokers.

In this manner, the trader is protecting him or herself from losing a significant amount of money and interest when his currency pairs aren't performing. Forex hedging should only be used experienced investors since it involves a detailed understanding of the fluctuations and changes in the exchange. - 23212

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