What is hedging in forex
Hedging is a trading technique where we opening positions sell and buy in the same pair. This technique is useful to lock our position so that the losses are not getting bigger
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Simply put, hedging is coming up wit h means to protect yourself against a large loss. A hedge can be seen as an insurance on your trade. Hedging would help you to reduce the amount of loss you could suffer if something you don't expect happens to your trade.
Direct hedges enable you to place a trade that buys a currency pair while at the same time you can place a trade to sell the currency pair.
A simple forex hedge protects you by allowing you to trade the opposite direction of your initial trade without the need to close that initial trade.
The major benefit of hedging is that it reduces the risk ( which is majorly due to movements in the exchange rate) your trade is exposed to and can even become a bigger part of your trading plan if done carefully.
Now let us take an example to demonstrate better the hedging process in forex. Now say you are long on the EURUSD at 1.30 and then it starts to move against you, what you now do is open a short position on the EUR/USD at say 1.28. Now if the exchange rate is on a downtrend, you can close the long position on a loss the leave the short position to run at profit.
However if you are not certain which way the exchange rate would go, you could preferably leave both open until a signal prompts you to close or set a stop to both or any position.
Let us try another example with the MT4.
Let us assume I hold two lots of long position in a currency pair like EUR/USD at $1.34. And I choose to hedge two short positions at $1.36. So when prices go against me, my maximum loss is reduced as one loss is compensated for with another win. In another case, I could go short when the market goes down or go long when the market goes up if the market is in a trading range.
Aside from this, there is also the option of hedging using multiple currency pairs. For example, you are long on the EURUSD and it starts moving against you, you can open another long position on USD/CHF. This is because EURUSD and USDCHF have over time in the forex well established themselves as currency pairs with inverse or negative correlation. That is when the EURUSD goes up, the USDCHF goes down.
This is how hedging works in the MT4 and the forex in general.