Hedging is simply a way for traders to protect themselves against a big loss that might come your way. It might be easier to think of hedging as having insurance on your trades. Hedging is a way to decrease the amount of loss you would potentially receive if something unexpected, as it often does in the Forex market, occurs. A simple Forex hedge protects you because it allows you to trade the opposite direction of your initial trade.
Hedging is one of the decisions you’ll have to make for yourself and weigh its pros and cons as a Forex trader. One of the advantages of using the hedge is that you can keep your first trade on the market and make money with a second trade that makes a profit as the market moves against your first position. The main reason that you would want to use hedging on your trades is to limit your risk. If done carefully, you can make hedging a part of your trading plan. Typically, it's advised to only be done by experienced traders that understand market swings and timing, such as Shawn Lucas. Lucas is the head trader at The Apiary Fund and suggests hedging after a lot of practice through your demo account before working your way up to your live account when your experience matters the most.
Hedging, for the most part, is a technique not by which you you will make money, but by which you can reduce potential loss. There are of course disadvantages to hedging too, such as, if the benefits received from hedging condone the expense. Going through my educational portion of trading, Shawn Lucas drives home to his trading community that the goal of hedging isn’t to make money but to protect yourself from unnecessary losses.
Risk is an essential yet delicate aspect of investing. Having a basic knowledge of hedging strategies will lead to better awareness of how to further your journey and career into the Forex industry. The most important step to start hedging is by choosing a pair you’re comfortable with trading, and practicing opening two trades when there is noticeable volatility going on in opposite directions. Notice how you feel when these two trades are moving along with the market and what it does to protect your trades. Hedging requires a lot of experience and with experience comes practice. So, don’t give up on yourself!