What is Hedging in Forex?
Hedge
Forex Trading Glossary
Quick Answer: A hedge is an offsetting position designed to reduce adverse currency moves, whether via the same pair, a correlated market, or options that cap downside.
What is Hedging in Forex?
Hedging is the practice of opening an offsetting position to reduce the impact of adverse currency moves. Corporations, funds, and traders use hedges to stabilize cash flows or protect open trades when volatility spikes.
Common Hedging Approaches
- Direct hedge: Take the opposite side of the same pair to pause exposure while keeping the core idea alive.
- Cross-hedge: Use a correlated pair or commodity to offset risk when the original market is illiquid.
- Options hedge: Buy currency options or structured products to define worst-case outcomes.
Know the Cost
Hedges are not free—they require margin, incur swaps, and may cap upside. Enter them with a plan to unwind once conditions normalize.
Building Effective Hedges
- Quantify exposure first: how many pips or dollars will a move against you cost?
- Select hedge size based on desired coverage—full, partial, or time-limited.
- Monitor correlation; if relationships break down, adjust the proxy hedge.
- Log each hedge inside your trading plan so you can review its impact afterwards.
Related Terms
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