Forex Brokers for Hedging

Hedging is a technique used to eliminate or avoid the risk. In our daily lives, hedging is a common practice but surprisingly most people don’t even know that. For instance, if we get our home, car, or any other asset insured, what does that mean?  We, basically, tried to seek protection against fire or break-ins or theft, so we hedged the risk of fire, break-ins or any unforeseen disaster by getting our valuables, insured. What about paying our utility bills on time? We use to hedge the risk of incurring any surcharge by paying bills on time.

Similarly, when talking about forex trading, hedging is a strategy that traders use to avoid large trading losses in an event of uncertainty or if something happens unexpectedly. Traders simply start trading in both directions of a trade. In Forex trading, hedging means eliminating the risk of adverse price movements.

There are different methods of hedging. Mainly, hedging can be classified into two methods including simple hedging and complex hedging.

  1. a) Simple hedging

Simple hedging in forex involves opening of two conflicting positions on the same currency pair. In other words, a trader opens a trade in one direction and at the same time, he opens another trade in opposite direction of the first trade. Both trades runs simultaneously. If the first trade is placed for a longer period with 0.10 lots on EURUSD, to hedge it, a trader would place another short term trade with 0.10 lots on EURUSD. This is done with a view that if one trade brings loses, it can be recovered to some extent by means of the other trade placed exactly in opposing direction. Normally, Traders open the second position as soon as the first position starts moving adversely, allowing the 1st position to reach certain point, after taking profit they may then adjust the stop for the second position to recover, provided that the analysis on the currency, actually works.

  1. b) Complex Hedging

Complex hedging techniques comprise of a number of methods that are not restricted to the spot forex market alone. A real complex hedging involves trading on a currency pair in the spot forex market and setting up an opposing trade as a hedge in the forex options market.

How does this work?

Consider if the trader Alex has a long trade setup in the spot forex market on the EURGBP and he wants to make a profit by the depreciation of the British Pound post-Brexit. Now if the pound doesn’t depreciate and instead, it starts appreciating, so to hedge a loss on this trade from a pound appreciation, Alex purchases an option with a strike price, lower than the price at which the EURGBP spot trade was made. Doing so, therefore, bars the shortcoming risk of the spot trade. But If the EURGBP appreciates as expected, the trade gains from the spot forex trade and just lose the premium amount paid on the option trade. If the EURGBP falls, then the spot trade will automatically be closed on reaching the stop loss and the options trade then has potential to be profitable. However, it depends on the number of contracts purchased and the extent of movement. Usually, institutional traders practice this type of hedging and that is how they make a lot of money even when markets behave against expectations.

Factors to Consider When Choosing a Broker for Hedging

  1. Regulation

If you are looking for a broker for hedging, always make sure that a broker you choose is regulated. The risk is somewhat embedded in hedging and some brokers do not provide favourable conditions for hedging. Similar to all types of trading, choosing a regulated broker is always a wise decision. Regulators such as Financial Conduct Authority have defined a set of rules with respect to hedging instruments. When you choose a regulated broker, it means that you are safe, since the regulated brokers are bound to abide by laws and regulations.

  1. The Hedging Style Allowed by the Broker

As we’ve discussed earlier that there are different methods for hedging. So if you are not comfortable using a simple hedging method, there is always an option for you to go for another one. Normally, it’s the broker who identifies what kind of hedging you can go for, considering all applicable regulations.

  1. Size of the Account Capital

Traders with bigger accounts need hedging more as compared to those having small funds available. Since, it requires more margin to be used for opening new, conflicting positions. What we mean to say is that traders who use hedging techniques require almost double the capital of traders who do not necessarily need to hedge their trading.

Merits of Hedging

The following are advantages of the use of hedging:

  • Hedging can avoid trading losses if used correctly.
  • It provides the opportunity for traders to enhance their trading skills.
  • Hedging is an essential tool for capital protection when markets are in turmoil.

Demerits of Hedging

Likewise all trading strategies, hedging can also lead to losses so traders, should not entirely be dependent on hedging, considering it to be safe. Hedging is not offered free of cost so the potential benefits must be taken into consideration comparing to the cost of a hedge. It is important to understand that hedging doesn’t promise you to make you profits but the main aim is to provide you reasonable security against potential losses.

List of Brokers That Allow Hedging

Avatrade: In 2006, a company with a name Avatrade, was founded. It was a combined effort of financial professionals having an aim of perfecting the online experience for retail traders. The broker offers trader, reliable environment, with complete security of funds. AVA Trade EU Ltd is based in Ireland and is regulated by the Central Bank of Ireland. Considering the needs of all stakeholders, the broker also offers an Islamic Account. The broker also offers hedging facility.

Hot Forex: Hot Forex is an online brokerage offering to trade in forex and commodities. The broker is based in Ebene House, 3rd Floor, 33, Cybercity, Ebene, Mauritius. The company is regulated by Financial Services Commission (Mauritius).Hedging facility is also available at Hot Forex. Minimum deposit required to open an account is just $5 at Hot Forex.

Trade.com: Trade.com is one of the premier brokers offering online trading in currencies and CFDs. The broker offers state-of-art MT4 and Sirix platforms. Multilingual Customer support is available 24/5 at the company’s official website. The broker is regulated by Cyprus Securities and Exchange Commission (Cyprus). A minimum deposit of $100 is required to open an account. The broker also offers Expert Advisors. Traders can also avail hedging facility at Trade.com. Traders having large balances can get a maximum benefit using hedging because it helps traders mitigating the risk of incurring major losses.

24Option: 24Option is an online leading brokerage offering to trade in Forex, stock and CFD. The broker offers some of the highest returns of up to 88% in the industry. The website is available in multiple languages. The broker offers a leverage of 1:400. The minimum deposit amount required to open an account is $250. Besides offering EAs, the broker also gives it clients, a facility of hedging. The company is regulated by Cyprus Securities and Exchange Commission (CySEC).

XTB: XTB UK is an FCA regulated brokerage company, founded in 2009. The broker offers to trade in currencies, stocks, indices, commodities and CFDs. Multilingual customer support is offered by the broker. The website of the broker can be accessed in multiple languages. Along with the MetaTrader4, the broker also offers EAs facility to traders. To avoid big losses, traders are allowed to hedge their trading. The broker offers three types of accounts including, Standard, Basic and Pro.

LCG: London Capital Group Holdings (plc) is a company registered in England and Wales with registered number: 05497744. The broker offers to trade in shares, forex, indices and CFDs. The company is fully authorized and regulated by Financial Conduct Authority (FCA). The broker offers services like EAs and hedging to its traders.

XM: XM is a brand name of Trading Point Holdings Ltd which wholly owns Trading Point of Financial Instruments UK Ltd (XM UK). The broker is fully authorized and regulated by the Financial Conduct Authority (FCA). The broker offers online trading in stocks, metal, currencies, commodities and CFDs. Currently, the company has clients from all across the globe. Services like expert advisors and hedging are also available at XM.

FXTM: The award-winning brokerage company is based in Cyprus, offers to trade in currencies, stocks and commodities. The broker is fully registered and regulated by Cyprus Securities and Exchange Commission (CySEC). A live standard account and a demo account is offered at FXTM. Traders are allowed to use hedging. The broker has institutional and retail clients from all around the world.

UMarkets: UMarkets is an innovative brokerage and trading platform that allows traders to open CFDs on Forex, commodities and indices. The company is known as an emerging market leader in financial trading. The broker is based in Belize and is regulated by International Financial Services Commission (Belize). To avoid risk, the company is offering hedging to traders having large funds.

 

Comments are closed.