Technically, forex hedging means opening two opposite positions (buy and sell) simultaneously to protect profit and avoid losses. Many brokers are now offering Hedging features. Typically traders do this when an open position is thought to move opposite to anticipation. To avoid losses hedge is built by opening the opposite position to that of the open position. The main purpose of this hedging is to protect already earned money.
Getting into hedge forex is easy, but getting out of it may involve a lot of trouble. When a trader always tries to get out of hedge forex in profit, he fails.
Let’s know, how to get out of hedge forex?
The simple way to get out of hedge forex is to use stop loss and close the trade. If you want to continue, open reverse trade with your existing trade and wait for the market to go in your predicted direction.
The major discrepancy of technical analysis TAs is that they can’t predict the major events affecting the market. Prices can fall anytime due to political and economic reasons. If the price falls considerably in your open position, hedging is the option that traders use to protect funds. Still, newbies should never enter hedge forex.
What Is Hedge Forex
In forex, a hedge is an emergency transaction done to protect ongoing and future traded positions from loss. Typically it is done by big market makers including investors and long-term traders.
Retail traders share only a few percent of the forex market. It is moved largely by the contribution of big bodies such as banks, hedge funds, cooperative funds, investors, and brokers.
To protect the retail traders from those who have a long position or speculating in the future to long, hedge transactions are implied. Similarly to protect the trader who has short the position hedge forex is used to protect the pair from upside risk.
It is important to understand that hedge forex is not a strategy to make a profit. It is a way to protect your trades from losses by cutting risk. Moreover, most hedges are used to remove only a portion of the risk, not all. There is always a cost of hedging that decides the percentage of risk to be minimized.
How to Get Out Of Hedge Forex: 5 Ways
Getting out of hedging is not as easy as you think. It requires advanced knowledge of charts and markets. Any sudden news can impact your fundamental as well as technical analysis. The market can any time move away from your predictions.
Below are a few best strategies to follow in order to get out of hedge forex:
Wait for the Market to Go In Your Favor
When you are in the hedge trade, the best strategy is to wait for the market to go in your direction. If this does not happen, accepting loss is better than staying in. Whenever big bodies enter the forex market, they try to play with the psychology of traders.
They always try to move the market opposite in your predicted direction by immediate transactions. If you want to get out of this situation, use tight stop loss or trailing stop and wait for the market to settle.
It is difficult to beat the hedge forex as you are nobody to do this as a retail trader. The currency market always moves with the contribution of big participants.
Reverse your Position
Another way to get out of the hedge forex is to reverse your position instantly. If you guess big participants making an entry in the market and you have established a position. The market will automatically start moving in the opposite direction of your opened position.
The right thing to do here is to reverse your position. If you have a Long certain pair, it’s better to Short it after hedge forex entry. Similarly, if you have a short position, it’s better long to get out of hedge forex.
Never Use Hedge Feature with Your Broker
Nowadays many forex brokers are offering a new feature called hedging. Many of you have noticed this new feature that many forex brokers have been offering called “hedging”. In this feature, they allow you to open two opposite positions simultaneously and they call it “hedging”.
For newbies, it is always risky. Whenever you enter a hedge trade you are actually entering an unwanted trade. So in both cases, you may lose. Never ever go with this hedging feature as a retail trader.
Institutional traders are much more professional, they can benefit from it. For traders with a lower portfolio, it is just a way to lose money. It is always in the favor of scam brokers. It is nothing more than paying spread 2 times.
Use Stop Loss
The simple strategy to get out of hedge forex is to use a stop loss. It must be put to the price where you don’t expect the current price would reach. The best thing to keep in mind when putting stop loss is the spread of the pair.
It will limit your loss during hedging. When you test your strategy of putting stop losses in order to avoid hedge forex you can imply it on your future trades. However, it may take 6 to 12 months to get comfortable with any strategy.
Close The Trade
If you don’t want to lose more in hedging, the sixth thing that you can do is close the trade. If you are at loss, it’s better to accept it rather than lose more. If your position is not in loss, it’s better to save yourself from losses.
If you can’t handle hedge forex like a pro, it would be good to stop the trade. Whenever your TA fails and the pair direction is always opposite to your prediction, it’s the best time to stop.
Frequently Asked Questions
Can you lose money hedging?
It all depends on the invested amount to outweigh losses. In many cases, you tend to lose money. If the investment is successful against hedging you can reduce your loss. It helps in reducing or balancing losses on existing investments rather than making a potential profit. You will have to pay spread 2 times, that’s costly too.
Is hedging in forex illegal?
In the USA, the concept of hedging is illegal. The CFTC is putting a ban on hedging due to the additional cost of opening 2 trades simultaneously. It always goes in favor of a broker rather than a trader.
Is hedging a good strategy in forex?
There are many pros and cons of hedging strategy. For newbies, it’s more likely to be prone to lose. It is good for swing traders, but it is not good for day traders. It has almost no benefit when the currency moves in the trading range.
To summarize, getting out of hedge forex without loss is challenging. Only pro traders with solid experience in trading know how to exit without losing account balance. Novice traders often end up in losses.
Therefore it is good for beginners to practice hedging on demo accounts. The only reason for hedging forex for retail traders is trading psychology not for making a profit. Pro traders just hedge the forex to let things go in the predicted direction.