Hedging Forex Tips for Winners

Forex Hedging was one of the main drivers behind the explosive growth of the FX markets that gathered momentum the early 1980s. Foreign Exchange controls which had restricted the movement of capital were abandoned in the UK in 1979. As a result companies could mitigate their FX exposure and were able to plan for the future and price their products accordingly.

 

 

For example if you were an exporter of fine china, with customers in the USA and sales in US Dollars but your overheads were in Sterling. Then you might wish to exchange your income in Dollars for Sterling on a regular basis, to avoid unnecessary currency exposure.

 

Equally a UK company that imported machine tools from Japan may have wished to sell Sterling to buy Yen periodically, in order to fix its costs. With free access to the currency markets companies were able to expand overseas. Furthermore they could raise finance internationally, from wherever capital was cheapest. For example borrowing money in US dollars and then converting and using those funds to build a factory or warehouse in France.

 

Free movement of capital and access to Foreign Exchange (or FX if you prefer) were the precursors to globalisation. Which for better or worse has and continues to shape the modern world.

 

Increasing use

As access to Foreign Exchange and overseas trade became more commonplace companies became more sophisticated in their requirements. Management could decide to take a view on their overseas sales and costs at the start of the year. And at the same time look at what they felt was likely to happen to relevant FX rates, over say the next 12 months. If they believed that these rates would move against them. Then they could “hedge” their exposure by selling or buying the appropriate currencies. They could also adjust their Forex Hedging throughout the year if their forecasts proved to be incorrect.

 

Forex Hedging for traders

Just as the speculative Forex markets developed from the corporate market so the practise of Forex Hedging moved from the corporate world into the world of Margin FX.

 

For example if you are investor with overseas share holdings, you may wish to protect their value through a Forex Hedge. Lets imagine that you anticipate the value of those investments will rise near term, whilst the currency they are denominated in is expected to fall against your base or domestic currency. If the price of these investments rose by 5% over the next month but at the same time the currency they are denominated in declined by the same amount, against your base currency. You would realise little or no return. However if you used Forex Hedging and sold the investments underlying currency (in the same size as the underlying investments value) subsequently buying it back after the drop, then you would benefit from the nominal rise in the underlying investments value. What’s more in this instance you would have realised a profit without having to sell the original investment.

 

Of course if your intuition about the currency is wrong and in particular if it appreciates versus your base currency, rather than depreciating, then the use of Forex Hedging could start to work against you. At that point you may choose to take off the Hedge by buying the short (sale) position back. Given the 24 hour a day 5 days a week nature of the FX markets closing your Forex Hedging positions should be very straightforward. What’s more using non deliverable margin trading to facilitate your Forex Hedging means you can benefit from the use of leverage and low deposits. Though always bear in mind that leverage works both ways. That is it amplifies profits and losses in equal measure and therefore that you could lose more money than you have placed on account.

 

Diversifying Risk

It also possible to use Forex Hedging to protect or diversify a portfolio of FX positions.
More than almost any other group of financial assets FX pairs and crosses share correlations. These correlations come about as a result of their underlying relationship with their peers and the US dollar. To which all currency prices are ultimately re-based to, or calculated from. That said these correlations are not uniform and they can be either positive or negative, strong or weak in nature and they can and do vary in strength and direction over time.

 

A spread of FX positions in different currency pairs may on the face of it appear to offer diversified exposure and to be spreading an investor’s risk. However if the positions in question are in the same direction and they all share some degree of positive correlation (that is a relationship where a change in the price of one will result in a price change in the same direction in the other positions), then they are offering anything but this.

 

Instead of diversifying exposure they are likely to be concentrating risk. However the investor can use Forex Hedging to open a position in the opposite direction, in a negatively correlated instrument, which should move in the opposite direction to the other positions in the portfolio and which therefore offers diversification and acts as a Forex Hedge.

 

Sterilise Positions

Traders can also sterilise some or all of their exposure via Forex Hedging.They can do this by taking an equal and opposite position to an open position on their account. So for example if they are long GBP USD and wish to remain in that position but are unable to monitor the price (if they are flying for example) then they may choose to open a short GBP USD position, in the same size. The P&L of this position will move in the opposite direction to the long position and will act as a hedge to the downside. Though it will also negate any additional upside in the original position. One of the benefits of this type of Forex Hedging is that it reduces the Trader’s margin requirements, in some cases to zero, for the sterilised positions.

 

A powerful and useful tool

The ability for companies to Hedge Forex exposure has been one of the main drivers of global growth. In turn this has helped to break down trade barriers and bring millions of people from the emerging economies into the global marketplace. This has therefore been of one of the biggest agents for change over the last 50 years.

 

Forex Hedging forms an important part of a trader’s toolbox, particular when they are looking to diversify their exposure or protect the value of investments held elsewhere, in a currency other than their domestic or base currency. Indeed sophisticated investors may even use Forex Hedging for asset allocation purposes. For example if they wish to quickly gain broad brush US Dollar exposure after some key data is released.

 

Understanding when to use Forex Hedging comes with experience of the markets. But even those new to trading can experiment with the practice by simply opening forex trading account and downloading the Blackwell Trader MT4 platform for their desktop PC or mobile device (iOS or Android).


Attached Files:

Posted By ricardomares : 27 September, 2020
Related Article

Types of Forex Orders Placing a trading order in forex trading already involves a bit of thinking, if you want to do it right. You should not only choose the currency pair you wish to trade and the price for entry, but you should also have an entry point determined, an exit point in view, a stop-loss set so that you don’t get hammered by an unexpected market reaction, and perhaps a take-profit set so that you can be sure to rake in your winnings if the trade works well.   This kind of trade is called a Market Order.     Bear in mind that there is a difference between the bid price and the ask price – you are paying the ask. You may wind up paying a slightly different price from what you saw quoted when your order is executed – this is because the market keeps moving while the system processes your trade.   Then you hit the button to start the trade, cross your fingers, and watch carefully.   But this is only one way to place an order: There are a number of order types that offer you special handling on your trade. These include:   Stop Loss Order Stop losses are mission critical for trading, and no trade should be without one. You can add or modify a stop loss separately from your order, even while the trade in is progress, but it should be part of your strategy to place a stop loss at the right place in every trade.   When your trade bets on a price rise, set the stop loss so that a plunge in the price will close your trade without too much loss – you should think hard about how much loss you can tolerate in each trade.  Vice-versa for a trade that is going short on a currency pair – set your stop loss to limit damage as the price rises. The stop loss stays in effect until you either cancel it or close the trade.   Trailing Stop A trailing stop is a very useful way to protect your trade while locking in profit. Here’s how it works: You buy a currency pair at the price 1.0000. You set the trailing stop 20 pips below that price. Now the price moves up to 1.0020. You trailing stop moves up to 1.0000. This cuts your losses – a fixed stop would have stayed at 40 pips below the market price. If the trade moves up to a much higher price, your trailing stop follows. Now, when the price begins to drop, your profit from the previous rise is locked in by the stop.   Limit Order A limit order is a simple concept – it enables you to buy at a particular price level or to sell at one.  If the currency pair is at 1.0000, and you want to buy at 1.0020, you set a limit order which tells the system to execute the buy at that price. If you want to sell at 0.0020, you do the same thing with a limit order. The advantage is simply that of executing your trade at the level you want without your having to worry about it.   Limit Entry Order A limit entry order is used to enter a long trade below the current market price or to sell a short trade above the current market price. A limit entry Order requires that you fix the entry price for the trade. The order will be executed at the requested price or at a better price.   Stop Entry Order This kind of order executes your trade at a future market price level. When you think a currency pair will go up 40 pips in price, set your stop entry order at that level. Now just sit back and wait until the trend works in your favor, and the price moves up to the desired level.   Good ‘Till Cancelled Order – Good for the Day Order This is a somewhat special type of the forex orders, in the sense that it stays in place as long as you want.   When you set a Good ‘Till Cancelled order, the order simply stays, waiting to be filled at the given price,  unless you cancel it This will continue indefinitely, hours, days, weeks, as long as you like.  This is a good way to place an entry at a specific level.   A Good for the Day order works the same way as a Good ‘Till Cancelled order, except that it expires at the end of a trading day. This is usually 5 p.m. in the local market, but you should check with your broker to learn when they cut off these trades.   One-Cancels-the-Other – One Triggers the Other This kind of order pair is particularly useful to hedge your bets. Place an order above, and another below the current price. If the price goes up, the other order is cancelled, and vice-versa. The other order pair does the opposite: When one order is executed, so is the other.

One of the things we all do when we know how to analyze or prepare for a trade is to put a lot of charts in front of us and then open the trade in a chart that matches our own analysis and strategy, in many cases if a few currencies fall into the analysis. Then do not leave to open trade in any. This is what most traders do. But in this case, how much you can be sure about your trades, maybe you can not reduce your stress until you close the trades.  So what to do, if you go to trade in one currency you may not be able to trade more daily, where if you follow more than one currency there is a lot of opportunities to trade. Yes, that's not a lie, but what is your main goal as a trader? Of course, trade safely and make a profit. So if so, you have to come to a conclusion. Yes, basically I am indicating how many currencies you will have on a regular basis.     To put it bluntly, I would say don't increase the currency as much as you can. Try to stay in 2 currencies if too much. 1 is better. Much like the birth control method. 1 is better if 2 is no more. I hope you do not have to explain the benefits of these 1 or 2.There are many secret sources for good trading, one of which is the currency target. All the information in many currencies can be very complicated for you, but if you target currency and trade in that currency knowing the beginning and end of that currency, know all the updates of that particular currency, or keep all the trading history of that currency in mind. And you don't lose anyway.   What are the advantages of trading in a currency?   - You know the daily range of the currency.- Where is the high-low of the currency in the last 10 years, where is it now and why?- How many pips the currency can change in news hours.- How much other currency currents affect this currency.- What is the total turnover of this currency per week?- What is the correction rate of the currency?- How long a currency stays in a trend line.   Yes, knowing the answers to the above questions means that you know everything about that currency, so you must agree with me now that the weaker the enemy, or the more information you know about him, the stronger you are in the fight against him. Be. So if you want to trade regularly in the Forex market and make a profit successfully, I would say stay in a currency. And become an expert in that currency. Extremely control yourself. I'm not saying it's bad to trade in multiple currencies, but apply my single currency suggestion and see if you do better than before. Then of course let me know.

The Foreign exchange (or forex) market is the largest trading market in the world. A decentralized global market with the massive trading volume of $5 trillion, it is way ahead of other trading exchanges such as commodity and stocks).     However, what do you think of its age? How old is it? 500 years? 200 years? No!   The open forex market, we trade, today is just 50 years old. Yes! And internet trading is only 30 years old. The story behind currency trading has much more twists and turns than this.   Read it yourself here!   In this article, we would take you to a fantastic historical journey of the foreign exchange market. How is started and evolved!   Let’s start!   Currency Trading: History and Evolution - The first standardized system for the exchange came in 1875, i.e. The Gold Standard. According to it, a nation can issue currency to the extent of its gold reserves. - In other words, the country which has more gold reserves would be able to release more money. - Before 1875, everyone relied on the barter system, which allows the exchange of one commodity for another, depending upon the value of the product. - After some time, gold, silver, and coppers started operating as exchange mediums. And as time passed, notes came into the game instead of metals, because of its noticeably low cost.   Fun Fact 1: Forex Markets dates back to as old as 250 BC.    Fun Fact 2: The first foreign exchange bank was established in Amsterdam, but was not globalized.   - The gold standardized system also failed soon. In World War I, the countries needed so much currency, above their gold reserves, that this system happened to be a disaster. - The money was required to purchase weapons, damaged properties, food, etc. continuously. - After the WWI, most countries dropped the gold standard system, but it was WWII which completely lost it. - Before WWII was ending, the most powerful nations came together and set up a standard monetary system. - Various plans, policies, regulations, and formation of financial institutions were discussed there. More than 700 representatives from different countries participated in Bretton Woods.   The following were the result of the discussion in Bretton Woods: - A new method of Foreign Exchange - Formation of different monetary agencies to patrol international currency-related activities. Agencies were the International Monetary Fund (IMF), the International Bank for Reconstruction and Develop, and the General Agreement on Tariffs and Trade (GATT).   Fun Fact 3: The US dollar would be the primary currency for the world and would replace the gold standard. - However, making the US dollar as a primary currency also didn’t go well. According to it, the US dollar would be the only foreign accepted worldwide currency. - In other words, anyone or any country could exchange his gold with the US dollar, and that is precisely where it all went wrong. - The US initially went very good, developed exponentially but later faced a significant mismatch between its gold reserve and the currency issued. - The over demand for the US dollar made this system failure. The rules of the Bretton Woods system became outdated. - Later in 1971, the US government refused to exchange Dollar for gold. The US president quoted that he wanted a free-floating currency market. Thus, the Bretton Woods system could not sustain that time. - After then, a free-floating market was established, which we call the foreign exchange market today. - According to it, demand and supply will decide the value of a nation’s currency, and an open monetary market was established. - Also, before this free-floating exchange market, the exchange rate was determined by the government bodies of countries and was utterly centralized. - However, the new system was decentralized and would work upon the supply and demand. - It also encouraged a healthy competition environment between countries. Every country worked towards making an action which was favourable for their currencies in the international market. - The US dollar came as the strongest currency at that time because of its global presence. And, this global presence was due to that old system. Pretty unfair! Right…? - With time, the market got developed. The forex market traders started earning from the changes in currency rates. Initially, before the internet, it was all offline trading and was only accessible only to certain places.   Fun Fact 4: Most traders were big organizations and institution at that time before the internet came.  - However, in the 1990s, the world got the internet. Thanks to some coding nerds, trading also started online. - Trading brokers and platforms began operating on the internet, and it allowed the small investors to become ‘the retail traders’ with the help of brokers.   Fun Fact 5: Banks started online trading platforms, but not for individuals. - With the help of these internet platforms, anybody could see a bid and an ask price of any currency. - And, then the rest is history. In no time, it became a full-time income generating source for many people.   Conclusion Isn’t the history of forex fascinating? How it started as a gold standard and went on to become a free-floating decentralized market, from the centralized one! Many people find it interesting.   And, the best part, after so many failures, disasters, and policy changes it is today the world’s biggest market. It operates 24/7, and is much more exciting, thanks to its volatility.   Forex still has a long way to go. But, you don’t have to worry about all this. Just make sure that you take the benefit. Trading forex is a great way to earn some extra bucks.


Post your comment