What Is Hedging And How To Hedge In Forex Trading With Virtually NO Risk

How To Profitably Hedge In Forex, with virtually NO risk.

In the world of investing, hedging refers to making multiple investments with inverse price-action relationships. If one investment weakens, another will strengthen at the same time, limiting the total negative impact that any single investment can have on a portfolio. Although hedging applies most directly to stock trading or investing in general, it is possible to put the concept of hedging into practice when trading currencies in the Forex market. Understanding how to use the concept of hedging in Forex trading can give you an edge in the market and increase your probability of earning consistent returns.

There are a number of ways hedging can be applied by traders to not only protect them from shocks but to also earn them some profit. The strategies are however quite complex and require keen attention in order for them to work. Generally, hedging is done to partially or fully cover a trader from risk. Before getting into how hedging can earn a trader profit, it is important to know how it works to mitigate risks.

Real Hedging

This technique is the safest ever, and the most profitable of all hedging techniques while keeping minimal risks. This technique uses the arbitrage of interest rates (roll over rates) between brokers. In this type of hedging, you will need to use two brokers. One broker which pays or charges interest at end of day, and the other should not charge or pay interest. However, in such cases, the trader should try to maximize the profits.

The main idea about this type of hedging is to open a position of one currency  (for example JPY) at a broker which will pay you a high interest for every night the position is carried, and to open a reverse of that position for the same currency with the broker that does not charge interest for carrying the trade. This way you will gain the interest or rollover that is credited to your account.

However there are many factors that you should take into consideration.

a. The currency to use. Right now the best pay to use is EUR/AUD, the interest credited to your account will be 2.30% every day for one standard lot.

b. The interest free broker. This is the hardest part. You should check if the broker allow opening the position for an unlimited time and if it does not charge commissions?

REMEMBER…

One of the best ways to manage such strategy is to monthly withdraw profits and balancing your positions. This can be done by withdrawing the excess from one account, take out the profits, and depositing the excess into the losing account to balance them. However, this can be costly. You should also check with your broker if he allows withdrawals while your position is still open, and the withdrawals fees.

If you have any questions, comments or opinions, feel free to post them using the commentary form below.

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