No, not this kind…
Hedging is a strategy when a trader buys and sells the same currency pair (and lot size) at the same time. The idea is that if the market is moving sideways without any particular trend, the trader would be positioned to close one side or the other once a trend is identified in the hopes that price moves in the anticipated direction. Seems kind of like a waste of margin, doesn’t it?
Why bother?
Well, there are a couple of reasons, back in the day when banks were paying a lot more interest, one could capitalize on receiving the differential between buy & sell interest amounts while letting their “net-zero” trade exist. Over time, that interest could add up into a fairly sizable amount, especially if you were trading a large lot size. Some traders try to identify levels of support and resistance and capitalize on a possible breakout…but alas…
Banks no longer pay that kind of interest, and it’s pretty much impossible to find a broker in the US (Compliance Rule 2-43 of 2009) who will permit hedging or find a broker who offers zero interest accounts to offset an opposing interest account and frankly, reasonably intelligent trading negates the need for dallying in such practices.
“Arbitrage”
Traders turned to something called “arbitrage” or “basket trading”. Arbitrage, the practice of exploiting very short-term pricing inefficiencies over multiple currency pairs; but, you’d need to have accurate real-time pricing quotes and the ability to respond very quickly.
Definitely something somewhat more advanced than the average trader might want to experiment with. Also, if you weren’t paying attention and missed the opportunity, your short-term gain could easily turn into a loss.
“Basket”
The alternative – basket trading is when a trader buys and sells a group of currencies simultaneously in very specific proportions to take advantage of price movement. Conventional wisdom states that by spreading (or diversifying) across multiple pairs, you express an “opinion” of what direction a currency might be going in without the exposure of a straight-up single currency pair trade.
However, if the collective movement of the price is not in the intended direction, you can still lose money – just not as fast because your basket of currency pairs offset each other to varying degrees. Some claim that it smooths out “volatility” during news announcements or other fundamental occurrences; however, the same thought applies here – best to learn how to trade smarter and not bother with all the parlor tricks.
Again, it’s a practice that really should be avoided, and those efforts spent on learning how to trade effectively.
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BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments. It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.