How to hedge risk in Australian forex trading?
The Foreign Exchange is an over-the-counter market where various currencies are traded. It works by trading one currency for another at a specific price and date. For example, if you wanted to exchange USD 100 for EUR 100 (Euros), you would say you wanted to make a “spot trade” of USD for EUR.
However, if you were looking to exchange your USD 100 in three months and expected the value Euro against the US Dollar to change during that period, then it is likely that this would be classed as a “forward contract” rather than a spot transaction.
Typically when we discuss forex trading, we are talking about the spot market, the act of buying one currency and selling (and then, hopefully, buying back) it for a higher price at a different date. Learning all about hedging is a step in the right direction towards being profitable in the forex market.
What is hedging?
Hedging involves taking an offsetting position to safeguard against loss in adverse price movements. Hedging ensures that you lock in your gains if there is early profit booking or the trade doesn’t move as expected. However, more importantly, it helps minimise any losses to make still trades, knowing you are already protected against risk.
It makes sense because markets have unpredictable tendencies, so hedging against any negative changes before they happen means you are protecting your initial investment. If this sounds confusing, don’t worry! It will all make sense soon.
What are the benefits of hedging?
Hedging your trades means any unexpected events won’t catch you out since you will already be protected against risk. Most importantly, it allows you to solidly plan out your trades and not worry about making hasty decisions that could ruin everything.
We all know how complex planning can be in business or for personal reasons, so why would anyone want to do this for forex trading? Remember, if the market changes, don’t panic! There’s nothing to worry about when you hedge because whatever happens – good or bad – you’ve covered yourself already.
Once you’ve planned what you want to do, ideally around 24 hours in advance, all that’s left for you to do is decide when best to take the trade and how much money you’re willing to risk. A typical (and safer) amount would be 1-5% on any given trade; if this sounds challenging, then don’t worry as we will go through some simple exercises later, which will explain how to work this out.
If you are looking at hedging your risk in Australian forex trading, I suggest getting help from a broker who can do it all for you.
Why is this?
Because even though it takes time to sit down and plan out your trades, knowing that you are covered against risk helps alleviate any stress or worry early on in your trades which will ultimately make things easier for you when it comes down to decision-making. Here are some quick step-by-step instructions (with images) on how best to hedge with a broker.
First things first
Sign up for an account with a forex broker in Australia that offers to hedge. Make sure it’s the right fit for you because not all brokers offer this service, and if they don’t, it will be difficult for you to carry out hedging in the future. Once the account is set up, log into your online platform or download your MT4 copy so that you’re ready to start trading!
Now choose which currency pair to trade
The next step is choosing which currency pair you want to trade with. It’s best to choose one with likely fluctuations, or there won’t be much point in hedging! For example, EUR/USD pairs typically have good movements, making them safer and more promising trading pairs.
Lastly deposit your funds
Continue by depositing funds into your account; make sure you have enough to cover all the costs if the markets don’t turn out in your favour. You should ensure that you haven’t gone overboard with deposits because this will only add unnecessary pressure when it comes time for decision making.