A Defensive Tactic in Forex Investment: Hedging

When you start your learning process in the world of investments you will likely hear the term hedging thrown about leave a bit. It is used particularly by people that participate in the various stock markets and it is also known as Forex hedging in the foreign exchange currency in Forex Trading. What is it and how is it beneficial to you? 

A bonafide hedger

A bonafide hedger is someone with an actual product to buy or sell. The hedger establishes an off-setting position on the futures or commodity exchange, thereby establishing a set price for his product. 

Actually buying a hedge is known as being "Long" or "Taking Delivery". Even selling a hedge is known as being "Short" or "Making Delivery". These positions are known as "Contracts" are legally stuck and enforced by the exchange. 

There is not a crystal clear definition that can easily explain what hedging really is. The best example involves comparing it to an insurance plan. The purpose of an insurance plan is to help you recover your loss if you would have some negative event occur, unfortunately. 

Now, we all have a pear or close one that has lost a home or a car to some unfortunate event. The insurance did not prevent the event, but it helped them to recover some or most of their losses. Forex hedging works in a similar manner. 

Hedging is used quite often by not only the big institutions and investment companies but by smaller, individual traders as well. The most common way to protect your investments is by putting money in two opposite places. For example, natural gas prices typically increase in the winter months in America and electricity prices tend to decrease slightly. 

By investing in both instruments simultaneously, you could prevent yourself in the event that one should drop eventually. It may look too expensive to try and put money in two different places, but the protection provided by the Forex hedging will be worth the peace of mind. 

Along those parallel lines, you should compare the costs of the hedge against the potential gain from the investment. The goal of investing is, naturally, to make a profit by Forex Trading Tips. Hedging does not generate profits in itself but acts as an insurance plan so you need to proceed with caution and wisdom. 

The most common way people hedge their investments in Forex is by the use of futures contracts. This allows an investor to exchange one currency for another at a definite date in the future at the stake of the last closing date. This type of Forex hedging takes advantage of items that fluctuate i.e. rise and fall opposite of one another, and thus reduce the risks. 

Should you hedge? That is left to your investment flow and funds availability. Keep in mind, some investors go through their entire investing career and never hedge at all. Some bigger corporations use it on a very regular basis. And some small investors absolutely swear by it.