What is hedging on Forex?

Hedging is one of the most popular forex trading tactics. The essence of it is to reduce the dangers of investing in any instrument (or tangible asset) by investing in another.

As practice has shown, this means that on the Forex market, a trader must be able to open balanced positions in several currencies at once, so that the possible losses from one position are almost completely compensated by the profit on the other.

It must be emphasized that hedging is actively used in all markets. Moreover, it should be aimed at reducing the risk of loss when the market value changes (in other words, the currency exchange rate), but its use must take into account not only the price factor, but also all other parameters - for example, government management of lending rates.

Hedging is the main goal of the operation. And to achieve it can be used different tools. In general, they are divided into two large groups, these are stock exchange and over-the-counter instruments. The final are mainly forward contracts. In this case, operations are often made directly between 2 agents, less often with the mediation of a third party (dealer).

In the Forex market, exchange instruments are used to hedge. Futures are considered one of the main ones, in other words, contracts for the purchase of foreign currency in the future, when the currency pair specified in the agreement will be sold at a predetermined price.

There is another hedging tool - options. This is the name of the contract, which gives the right to sell or acquire an asset (also tangible) on a predetermined date and at the price stated in the contract. It should be noted that this is actually the right, not a promise. And thanks to this, the option holder can refuse to fulfill the contract, however, having lost the stipulated bonus.

Other tools are used in Forex. For example, it can be a technique, which is called a Lock Position (closed position). This technique takes into account opening at the same time 2 counter transactions (sales and purchases) in the same currency pair and with the same volume. This can secure a bank deposit. True, it will not rise at the same time, staying at the same level. This option is specifically for insuring transactions.