Hedging Forex Positions

I am exploring the possibility of going with a broker that permits hedging or being long and short in a forex pair at the same time.

I am a new trader and this is a new concept to me; why would anyone want to be long and short at the same time; it seems to me one position would cancel out the other and there would be a net loss on the two positions considering the spreads.

As I mentioned, I am a new trader; could someone please clarify how to hedge a forex position and the various strategies that can be used to hedge a forex position or refer me to resources which may provide the information I am seeking.

Thanks for reading my post


Don’t try running before you can walk properly.

Given the fact you’re a new trader, would it not be more constructive to continue working your strategies, risk & position models?

It might also benefit you to spend some quality time familiarizing yourself with, & exploring the positives of honing your psychological strengths.

The concept you speak of is nothing but utter nonesense. There is absolutely no reason whatsoever that a new trader such as yourself would require to net out their position.

Focus on honing your analytical & trade planning skills, & leave all the laughable fancy tit bit nonesense to those who think they know more than they actually do.

Beautiful response Jimmymac! Later on John1john you might want to play 2 timeframes which might lead to the possibility of a hedge but I find its much clearer if you use different platforms for that. But as jimmymac says leave that for much later and be prepared for many months and likely years to master this completely crazy and for some of us addictive business

Just want to emphasise this from Jimmymac. Too few people realise that this is 80/90 perhaps 95% about your psychology and understanding that, recognising your weaknesses and finding ways round them. It is for this reason that people will often be successful on demo but not in real trading (although there are some very real issues within the real market as well that add to the failure rate).

Why wont anyone answer his question?

The main use of hedging for me is when you have a carry trade e.g. gbp/jpy, when you see that the market is dipping you can hedge your carry trade (long term long with interest). Take the profit from the hedge and then leave the main carry trade to recover.

Im not explaining it too well but I hope u get the gist of it, some would arge to close the long and go in short but thats even riskier i think. There are other uses of hedging in ranging markets but its quite advanced stuff

Perhaps its you thats confused! Hedging is no different than closing and reopening the trade after the retrace or as I put in in post 3 to take a trade in a different timeframe and therefore in a different direction. However the whole point is for someone new to avoid such shenanigans as there is plenty of much more important stuff to learn and practice. There are roles for hedging especially where trading costs are high but thats not the place to start

If you are doing a hedge of a short GBP/JPY position against a long GBP/JPY position to collect carry, and not doing it with different brokers, you are losing money all the way around. Just as there is a bid/offer spread in price, there is a bid/offer spread in the carry interest rates involved. That means when you are long GBP/JPY you are earning less than you are paying when you are short GBP/JPY. At best, if you broker uses at flat rate either side it ends up being a complete wash.

Of course, if you use different brokers with rates different enough to make it worthwhile then by all means arbitrage that opportunity for all it’s worth!

Well im def no hedging expert! And while some of my hedges have been succesful most have messed me up. I already told myself to not do it in the future but guys will be guys :slight_smile:

If you have a long you have a few options as I see it, for bullish trend(correct me if im wrong)

  1. Close your long, wait for the dip go back into long when its over
  2. Hedge the dip, close the hedge when the dip is over
  3. Close the long, go short then go long when the dip is over

To me hedging is medium risk rather than closing the long and going short then long again which is much higher risk and higher spread. Ofcourse this is only true for an upward trend.

What would be easier if one of you experts could say how hedging could be useful rather than saying dont use it, we can then work out how difficult it is and stay the hell away.

But what you’re referring to isn’t hedging at all. It’s merely a very crude & futile [I]jobbing[/I] exercise, assuming you’re executing these netting out trades from 1 account? You’re just massaging & increasing your costs (spreads/comms/margin).

Unless you’re laying large positions up & down the ladder or you’re adopting a grid play for specific aims, then why on earth would you want to increase your bottom line costs by netting out a trade?!

It seems to me that the type of exercise you’re referring to equates more to a lack of confidence in one’s trading plan or objectives rather than a desire to promote a genuine hedging facility.

If you’re looking to incorporate hedging as a complimentary avenue then rhodytrader has offered a very valid pointer in the thread below…which I note has been initiated by the same guy who kicked this one off.

So, get your studying hat on & google away to your hearts content - there’s plenty of sensible [I]options[/I] information out there for those intent on working their grey matter!


Ok i thought when u have both long and short of the same pair that u are “hedging”

This hedging stuff sounds way too complicated for me so I will quit here on this post, im still on demo so im still trying out new things.

I personally would never call that “hedging”, but that’s come to be the term in retail forex for this long/short thing. Try calling it that when talking with an institutional forex trader and they will just laugh and shake their head about how easy retail traders make it for the brokers to just take your money.

The best way i can think of to employ a hedge, or at least a partial hedge, is to use a different but highly correlated currency pair.

For example:

  1. Go long GBP/JPY (collect carry and some great directional moves)
  2. Go short at the same time CHF/JPY (you will pay interest for holding this one)

We know that GBP/JPY can make some very significant moves in or out of your favor. In fact, this par can move 2500 pips in a relatively short period of time. So, the main idea of this kind of hedge is that when the pair moves against you, you can still get some profit out of the short CHF/JPY position therby “hedging” some of the risk

Sounds easy? Not as easy as it sounds!

Some things to note when doing this kind of hedge:

  • These two pairs tend to remain highly positively correlated. I think this year so far has them correlated at almost 0.80. Despite this, the volatility of the 2 pairs are very different. If GBP/JPY moves up 300 pips in a day, the CHF/JPY might move up only 100 pips.

  • Sometime the correlation relationship between the 2 pairs breaks down. That is when the hedge will completely break down as well and you end up worse off until the correlation is restored.

  • Because the CHF/JPY is far less volatile, you should not expect to get a great hedge by trading 1 contract of each. You might have to trade 1.5 or 2 contracts of CHF/JPY for every 1 position of GBP/JPY to compensate for the volatility differences.

  • The interest you gain from holding long GBP/JPY is far greater than the interest you will pay for holding short CHF/JPY so the net effect is still a positive carry. Even if you trade double the contracts of CHF/JPY you will still end up net positive for interest.

I have been testing a version of this idea and it looks good so far. 10 years of data is alot to sift through but so far so good. Keep in mind that i also average up and down into positions so depending on your specific implemenatation the idea may or may not look as good.

Anyway…just food for thought for everyone.

This change in correlation is the result of changes in the GBP/CHF relationship (one of the least volatile of the major pairs), which is basically what you create in your account when you go long GBP/JPY and short CHF/JPY. That’s the thing you need to be aware of when you trade multiple pairs, even if you aren’t actually looking to hedge anything.

I see what you’re saying and i don’t disagree. However, the result of the above strategy cannot be replicated by simply trading long GBP/CHF. This is because you are shorting more contracts of CHF/JPY than you are trading long contracts of GBP/JPY.

Well, keep in mind that the [I]value[/I] of a lot in GBP/JPY is much larger than a lot in CHF/JPY since GBP/CHF is up over 2. If you don’t match the value of the two positions exactly, you’ll end up with a large GBP/CHF exposure and some other exposure, depending on the weighting.

True. I hadn’t really thought of it from that angle.

But i’m not sure i fully understand. The value or exposure you get with 1 lot of GBP/JPY is the same as the exposure of 1 lot of GBP/CHF (about $2000 USD). So by shorting, say, 2 lots of CHF/JPY, whose value in such a case would be about $1730 USD, you are effectively offsetting some of the risk assuming the 2 are correlated well enough. No?

Forgive me if i am way out in left field on the math (i feel i am) but i just never thought of it from the perspective you’ve laid out so i just want to be sure what happens from a value or exposure point of view.


You’re right. The value of a lot of GBP/JPY and GBP/CHF are the same, since both have the same base currency. And since GBP/CHF is around 2.3 you would need that many lots of CHF/JPY to completely offset a GBP/JPY position, meaning you would make it completely into a GBP/CHF long. If you sell two lots of CHF/JPY you do offset most of the JPY exposure, but in doing so you’re creating the GBP/CHF exposure instead.

The only way to completely hedge one pair with another actually requires a 3-part hedge - a triangle position. In the above example you would a one lot long position in GBP/JPY would be offset with a 2.3 lot short in CHF/JPY. That would get rid of the JPY exposure completely, leaving a 1 lot long in GBP/CHF, which could then be offset by selling a lot of that. Of course you’re losing the spread all the way around and probably going to be on the wrong side of the interest carry, so there’s no real reason to do that sort of thing.

Hedging is more successful for long/mid term quantitative risk management, its particularly difficult at the moment on the major fx markets although a few of the quite corners still produce positive reduced risk positions.

It simple terms, long term positions are hedged to tactically maintain risk policy using quant methods to [B]continue[/B] earnings, in fx spaces earnings are essentially interest rates. The capital appreciation element to growth is arrested or reduced during a correctional hedge cycle.