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Successful Forex Hedge Strategy that Makes Money
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http://www.forexreviews.info - Looking for a good Forex hedging strategy that works? If so, then this strategy is very effective and highly profitable. This video shows that with one pair one can make more than 1400 pips over 2 months with simple set and target trading methods. Works best on h4 time frame however can be adjusted to suit others.
To work effectively one must add the daily support and resistance zones as potential trading areas.
For more on this trading style and method - http://www.forexreviews.info/using-a-.
Please Note - This video is for demonstration purposes, major support and resistance do move slightly over time, however as an example 1.26, 1.28, 1.30, 1.32, 1.34 and 1.36 are all major structure points that have been valid on EURUSD for over 2 years now.. Before trading with real money I highly recommend testing on a demo account first.. Good luck..
Disclaimer - If you decide to trade live, trade at your own risk and do not trade with money you cannot afford to lose..
What is hedging as it relates to forex trading?
Hedging is a strategy to protect one's position from an adverse move in a currency pair. Forex traders can be referring to one of two related strategies when they engage in hedging.
A forex trader can create a “hedge” to fully protect an existing position from an undesirable move in the currency pair by holding both a short and a long position simultaneously on the same currency pair. This version of a hedging strategy is referred to as a “perfect hedge” because it eliminates all of the risk (and therefore all of the potential profit) associated with the trade while the hedge is active.
Although this trade setup may sound bizarre because the two opposing positions simply offset each other, it is more common than you might think. Oftentimes this kind of “hedge” arises when a trader is holding a long, or short, position as a long-term trade and incidentally opens a contrary short-term trade to take advantage of a brief market imbalance.
Interestingly, forex dealers in the United States do not allow this type of hedging. Instead, they are required to net out the two positions – by treating the contradictory trade as a “close” order. However, the result of a “netted out” trade and a hedged trade is the same.
A forex trader can create a “hedge” to partially protect an existing position from an undesirable move in the currency pair using Forex options. Using forex options to protect a long, or short, position is referred to as an “imperfect hedge” because the strategy only eliminates some of the risk (and therefore only some of the potential profit) associated with the trade.
To create an imperfect hedge, a trader who is long a currency pair, can buy put option contracts to reduce her downside risk, while a trader who is short a currency pair, can buy call options contracts to reduce her upside risk.
Imperfect Downside Risk Hedges:
Put options contracts give the buyer the right, but not the obligation, to sell a currency pair at a specified price (strike price) on, or before, a pre-determined date (expiration date) to the options seller in exchange for the payment of an upfront premium.
For instance, imagine a forex trader is long the EUR/USD at 1.2575, anticipating the pair is going to move higher, but is also concerned the currency pair may move lower if the upcoming economic announcement turns out to be bearish. She could hedge a portion of her risk by buying a put option contract with a strike price somewhere below the current exchange rate, like 1.2550, and an expiration date sometime after the economic announcement.
If the announcement comes and goes, and the EUR/USD doesn’t move lower, the trader is able to hold onto her long EUR/USD trade, making greater and greater profits the higher it goes, but it did cost her the premium she paid for the put option contract.
However, if the announcement comes and goes, and the EUR/USD starts moving lower, the trader doesn’t have to worry as much about the bearish move because she knows she has limited her risk to the distance between the value of the pair when she bought the options contract and the strike price of the option, or 25 pips in this instance (1.2575 – 1.2550 = 0.0025), plus the premium she paid for the options contract. Even if the EUR/USD dropped all the way to 1.2450, she can’t lose any more than 25 pips, plus the premium, because she can sell her long EUR/USD position to the put option seller for the strike price of 1.2550, regardless of what the market price for the pair is at the time.
Imperfect Upside Risk Hedges
Call options contracts give the buyer the right, but not the obligation, to buy a currency pair at a specified price (strike price) on, or before, a pre-determined date (expiration date) from the options seller in exchange for the payment of an upfront premium.
For instance, imagine a forex trader is short the GBP/USD at 1.4225, anticipating the pair is going to move lower, but is also concerned the currency pair may move higher if the upcoming Parliamentary vote turns out to be bullish. She could hedge a portion of her risk by buying a call option contract with a strike price somewhere above the current exchange rate, like 1.4275, and an expiration date sometime after the scheduled vote.
If the vote comes and goes, and the GBP/USD doesn’t move higher, the trader is able to hold onto her short GBP/USD trade, making greater and greater profits the lower it goes, and all it cost her was the premium she paid for the call option contract.
However, if the vote comes and goes, and the GBP/USD starts moving higher, the trader doesn’t have to worry about the bullish move because she knows she has limited her risk to the distance between the value of the pair when she bought the options contract and the strike price of the option, or 50 pips in this instance (1.4275 – 1.4225 = 0.0050), plus the premium she paid for the options contract. Even if the GBP/USD climbed all the way to 1.4375, she can’t lose any more than 50 pips, plus the premium, because she can buy the pair to cover her short GBP/USD position from the call option seller at the strike price of 1.4275, regardless of what the market price for the pair is at the time.
How to Hedge Your Forex Trades
With all currencies of the world fluctuating in value nonstop, there are of course going to be a huge number of different trading opportunities available to you, no matter when you decide to log into the trading platforms offered by our featured Forex Brokers.
However, it is often going to be the case that a trader will prefer using their own unique trading strategy when picking out just which trades to place and the amount they are prepared to risk on each trade they do place.
Risk is a very important aspect to you becoming a Forex Broker, for whilst there can be some very substantial and ongoing profits to be made in both the online and mobile Forex trading environments, you do always run the risk of making a loss.
Having a deep understanding of the money markets is what allows most traders to make continuous trading profits, however when they couple their knowledge of the money markets with a very well thought out trading strategy that can also reduce the risk of making a loss.
With that in mind you may be wondering if there is any way you can minimize your chance of making a loss when placing Forex trades. There are of course lots of different forex trading strategies you may be interested in adopting, however one which does appeal to a lot of traders is something known as a Hedging Strategy.
When a trader hedges their trades they are placing more than one trade on the outcome of any two currencies they have paired up together. However, it is worth noting there are only a small number of circumstances when that is going to be financially feasible.
With that in mind below is a quick step by step guide which will enlighten you as to how you may be able to hedge your Forex trades, so read on to find out how this can be done.
Choosing Two Currencies to Trade
One thing worth keeping in mind is that there are some currencies that are going to allow you to place a much larger range of different trades on those currencies. With that in mind if you do want to have the option of hedging any Forex trade you have placed you should be pairing up some of the major currencies as opposed to the minor currencies of the world.
With that in mind make sure you are considering pairing up US Dollars, the UK Pound, and AUD and CAD along with the Euro. By doing so you will find plenty of different types of trades are offered on those pairings which will give you many additional ways to hedge your trades.
Bonuses and Hedging
Having the trading budget to be able to place additional trades once you have several trades already open and live is another factor that needs thinking about. You will never want to experience running out of trading funds when a hedging opportunity arrives.
You are going to find that many different Brokers will be offering you some form of bonuses, either when you sign up as a new client of those Brokers or an ongoing bonus type offer may be made available to you.
By you making use of those bonuses and promotional offers you can often massively increase the value of your trading budget, and that will obviously see you having a much higher valued trading budget and having enough funds available to allow you to hedge any open trades you currently have active.
One way of you then using those bonus funds to hedge any trade is by placing an opposing trade at two different Brokers, but using the bonus funds to pay for those trades.
Whilst of course when you place an opposing trade at any two different Brokers one will be a winning trade and the other will be a losing trade. However, as it will be bonus funds you are using to place and fund those opposing trades that mean you will not be using your own real money funds on those trades.
As long as you utilize bonuses which only require a small volume of trades needed to be placed with those bonus credits before they become real money funds, then there is a good chance that one of those two bonuses will bear fruit and will enable you to lock in a profit overall, which is what you will of course be aiming to do when hedging your trades.