Quote:
Originally Posted by shadow
hedging is just have two opposing positions on the same pair. So for example say you go long on the EUR/USD. To hedge it you would go short with a different position. That's really all there is to it
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Technically, taking a long AND short position on the same pair is called
offsetting, not hedging.
A good example of hedging is taking two different pairs that are highly correlated and opening positions on both of them simultaneously.
Example: Long EUR/USD and Long USD/CHF. Since the two pairs are inversely correlated, assuming you opened equal position sizes for each pair, your net position should stay close to neutral. Of course, this correlation decouples from time to time, so be careful.
Another example is if you were bullish the dollar due fundamentals but wanted to minimize your risk. Out of the four majors, you could pick whichever felt has the best technical bullish setup, and go long. Let's say USD/CHF. Then you could pick a pair that's not considered a "major" that shows better fundamentals/technicals than the USD. Let's say USD/MXN. So you would go long USD/CHF cause you're dollar bullish, but short USD/MXN at the same time to hedge your bet, just in case you're wrong.
however, be warned, the risk is much greater, so unless you are confident with your decision to go long or short on EURUSD and USDJPY, don't do it.
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