📘 Glossary intermediate

Hedging

Also known as: Forex Hedge

Hedging is a risk management strategy that opens an opposing position to offset potential losses from an existing trade.

Hedging is opening a position that offsets the risk of an existing position. Think of it as financial insurance against adverse price movements.

Types of Forex Hedging

1. Direct Hedge

Open a sell position on the same pair you’re long
Example: Long EUR/USD + Short EUR/USD
Net exposure: Zero

2. Cross-Currency Hedge

Use correlated pairs
Example: Long EUR/USD + Short GBP/USD (positive correlation)

3. Options Hedge

Buy put options to protect long positions
Limited cost, defined risk

Example

You’re long EUR/USD at 1.0850 and worried about a rate decision:

Open a short EUR/USD position
If price drops: short profits offset long losses
If price rises: long profits offset short losses

Advantages & Disadvantages

✅ Reduces downside risk ✅ Protects during uncertain events ✅ Can lock in profits

⚠️ Reduces potential profits ⚠️ Double spread/commission costs ⚠️ Not all brokers allow hedging ⚠️ Complex to manage