Studying Hedging

Hedging is one of the essential skills or strategies that a forex trader must know.  Thus,  this topic is very crucial towards learning forex trading. In this article,  we will try to share some thoughts on how to apply this strategy as well as its advantages and disadvantages.

What is Hedging?

Hedging,  as defined by most experts, is the act of offsetting possible losses in a trade by trying to find other means or forms of investments that could bring an income in case of loss in other investments.

The money market hedge

This type of hedging is utilized in the forex trading industry. Specifically, this technique is designed to lock in the value of a foreign currency transaction to a local value. In most cases,  money market hedgers utilize other forms of financial instruments such as futures or CFDs in places where they are accepted.

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Advantage of Money Market Hedge

Money market hedging is usually used by Forex traders as a technique to catch up or offset possible losses that were made by their previous actions in the market. This technique offers advantages such as:

  1. Eliminates downside exposure

Downside exposure could cause losses so if a trader decides to hedge in the money market,  this could help fix a future rate because instead of waiting for the actual currency rate to be released in public,  the two agreeing parties can already decide and fix the rate prior to such release. 

2. Flexibility

As mentioned earlier,  hedging in the money market uses financial instruments such as futures or CFDs.  explaining further,  these mentioned financial instruments include contracts between the two parties.  and when we say contract,  we’re made to understand that both people who are involved in the agreement can negotiate and meet in between to determine the rate that gives both of them a win-win situation.

3. Feasible

As a tool for adjusting or offsetting the risks of utilizing currencies,  money market hedging could be considered feasible in areas where people cannot have much access to forwards contracts.  One possible instrument that people could use to hedge their position is utilizing other financial instruments such as CFDs.

The disadvantage of Money hedging

Similar to other strategies,  this trading move does not always provide a bed of roses to its patrons.  technically,  it also has drawbacks like the ones listed below.

  1. Complicated procedure

Money hedging strategies may provide good advantages but their complicated setup and procedure could affect someone’s interest to perform such moves.  For someone who is still learning the basics of ‘what is Forex trading?’ We strongly suggest that thorough study and research are needed to make the most out of this move. 

2. Losing other opportunities

The tendency of most traders when involved with this move is to devote themselves to the practice of such a technique. If this happens to you,  you will have the tendency to forget about other means of hedging and this could mean failure to explore other avenues to earn profit.