What Is Hedging ?
Basically, hedging involves the buying (or selling) of currency pair(s) in order to protect the hedger against unwanted currency fluctuations. Traditionally, hedging was used to protect the profits of multinational companies from unfavourable currency fluctuations.Hedging is a great way for these companies to protect their profits, but unfortunately many inexperienced Forex traders have incorrectly applied the same principles to their trading activities.Here’s how a Forex trader may try to hedge his position:Imagine that I buy the EUR/USD currency pair, and the market immediately moves against my position (i.e. prices went down). At this moment, I would be facing an unrealized loss. In order to ‘protect’ myself against further losses, I might sell the EUR/JPY currency pair in the hopes that any gain in the latter pair will partially offset the losses of the former pair.Essentially, I’ll be holding on to two simultaneous ‘long’ and ‘short’ positions for the Euro currency. Hedgers hope that the results of both positions will partially cancel each other out.
Why Hedging is A Bad Idea for Retail Traders ?
This method of hedging is a deathtrap waiting to spring. The original purpose of a hedge was to reduce the uncertainty of company profits.To the retail trader, however, this does the exact opposite!Such a hedging strategy simply leaves too many factors open to risk. Although the Euro price fluctuations may be some what muted, the ‘retail hedger’ now has worry about the USD and JPY currencies too! The EUR/USD and EUR/JPY pairs are not highly correlated and may end up causing an even larger total loss in the end.Many people like to hedge because they don’t want to admit that they made a bad trading decision. They try to ‘safely’ hold on to a losing position for as long as possible in this manner, but don’t realize that they’re actually exposing themselves to even greater risks!
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Speaking frankly Forex is a great way to earn easy money and work only a few hours a day (even a few minutes) but let’s be honest it is not for everybody. You need to have supreme mental abilities and self control if you want to take advantage of Forex not to get Forex to take advantage of you.
I know many people who started trading currencies with the great ambitions to change their lives and make good money but most of them failed. It appears that this is work only for those who can survive under serious pressure. When you play demo accounts it looks really easy (and this is why most of the brokers have this option for new comers). You can even create a really working system and double even treble you demo money only in a couple of days. The truth is that this is what causes many people to put on the platform money which they cannot afford to lose. And here is the problem: it appears that many players know exactly what to do when they win but when they are not mentally prepared to loose. They easily turn a small lose into disaster making a consequence of wrong decisions.
It is really good to have in mind that the money someone is winning in Forex is the same money that somebody else is loosing there. Our advice is trivial but precious: “Never to play with more than you can afford to loose”.
