Foreign Currency Hedging Example – Hedge Trading On The Forex Currency Market

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Trading on the forex currency market can be a volatile yet exciting form of investment and certainly has the potential of bringing vast rewards if done so properly. Foreign Currency Hedging Example

However it should be accepted that forex currency trading could also be a very risky investment as the market can swing both in an upward and downward movement in a split second depending on the market conditions. Some people, and indeed institutions, try to control these volatile market swings by hedge trading their investments.

For instance it is possible with some forex trading systems to hold both a long and short position on a currency pair, which means that you have both bought a lot of currency with a view to profiting from the rise and the fall of a currency pair.

For example a currency pair could be the Great British Pound as related in value to the US Dollar or GBP/USD, and the rise in this market would be referred to as a long position as opposed to a fall in this currency market, which would be referred to as a short position.

In practice what this would mean is that either way the market moves you are gaining on one position while you lose the equivalent amount on the other position.

The net result of this on first sight would suggest that you cant particularly loss money but also you cant gain any money so how can this be of any particular use in an effort to successfully trade on the forex. 

Well of course no money can be made until you close one of the positions, which would be the one that is losing money while leaving the other currency position open that is gaining profit to move further and gain you an overall profit.

You could for example close the losing position at a 20 pips loss and then close the profiting position at a 40 pips gain, giving you an overall profit of 20 pips.

Pips are the single value point movement of the currency and where the GBP/USD moves from 1.8800 to 1.8840 would be a 40 pips difference.

It should be remembered of course that a currency pair could well move in one direction and exceed your 20 pips level to close the position but then reverse in direction and never reach your targeted gain level of 40 pips so even hedge trading is not a guarantee of certain success.

The 20 pips loss level and 40 pips gain level are only used here as an example and if you use this method of trading you would be well advised to set your own levels that you feel are right and acceptable to your own currency trading experience and acceptable risk strategy.

All that can be said is that it does offer an alternative method of currency trading but should still be ventured into with predetermined loss limits and careful study of the currency market.

With most online forex currency trading sites a demo account can be opened first to help you experience what forex currency trading is all about and this is an ideal way to first get involved without any loss of real money. Foreign Currency Hedging Example

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