Singapore Stock Market News
Using Hedging in Forex Trading
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Publish date: Tue, 28 Jan 2014, 09:14 PM
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One of the many tools used in Forex trading is hedging. Hedging is a means of protecting yourself against losses and reducing your exposure to certain risks while engaging in financial markets.
Hedging can be compared to insurance which you would take out 'just in case' something happens which involves a loss of money, life, fire, work etc. If any of these things does happen and you're properly insured the impact of the event is diminished.
When it comes to investing in financial markets, however, hedging is far more complicated than merely paying an annual premium to your insurance company. Hedging against investment risk means purposefully bringing into play specific instruments that can offset the risk of any adverse price movements. To do this, traders must hedge one investment by making another, usually in the form of derivatives.
There are many types of derivatives but options and futures are the most widely used. By implementing these instruments, an investor can design trading strategies where a loss in one investment is counterbalanced by a gain in the chosen derivative.
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