What is Hedging?

Monday, November 24, 2008

The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday.

For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.It is simply taking a buy or sell position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change.


Hedging is a risk strategy whereby investors and traders take offsetting positions in an instrument to reduce their risk profile. The practice usually involves taking both a long and a short position in an instrument and so, usually, necessitates using financial derivatives with which it's possible to short reduction sell.Hedging strategies are also employed by professional fund managers to control the risk exposure of large managed funds.

In this context, hedging is a more complex process as it involves a whole portfolio of different investments - each with its own unique risk/return profile.Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contractAn example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).
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6. ForexGen offers a free trial Forex demo account that allows you to test your skills and practice without risking real money.

Forex Hedging Strategy

Sunday, November 23, 2008


A forex hedging strategy is developed in four parts, including an analysis of the forex trader's risk exposure, risk tolerance and preference of strategy. These components make up the forex hedge:
1. Analyze risk: The trader must identify what types of risk he is taking in the current or proposed position. From there, the trader must identify what the implications could be of taking on this risk un-hedged, and determine whether the risk is high or low in the current forex currency market.
2. Determine risk tolerance: In this step, the trader uses their own risk tolerance levels, to determine how much of the position's risk needs to be hedged. No trade will ever have zero risk; it is up to the trader to determine the level of risk they are willing to take, and how much they are willing to pay to remove the excess risks.
3. Determine forex hedging strategy: If using foreign currency options to hedge the risk of the currency trade, the trader must determine which strategy is the most cost effective.
4. Implement and monitor the strategy: By making sure that the strategy works the way it should, risk will stay minimized. The forex currency trading market is a risky one, and hedging is just one way that a trader can help to minimize the amount of risk they take on. So much of being a trader is money and risk management that having another tool like hedging in the arsenal is incredibly useful.
Not all retail forex brokers allow for hedging within their platforms. Be sure to research fully the broker you use before beginning to trade.
Derivatives of using a hedge position :
Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between two parties to buy or sell an asset at a particular time in the future for a particular price. The main reason that companies or corporations use future contracts is to offset their risk exposures and limit themselves from any fluctuations in price. The ultimate goal of an investor using futures contracts to hedge is to perfectly offset their risk. In real life, however, this is often impossible and, therefore, individuals attempt to neutralize risk as much as possible instead. For example, if a commodity to be hedged is not available as a futures contract, an investor will buy a futures contract in something that closely follows the movements of that commodity.
When a company knows that it will be making a purchase in the future for a particular item, it should take a long position in a futures contract to hedge its position. For example, suppose that Company X knows that in six months it will have to buy 20,000 ounces of silver to fulfill an order. Assume the spot price for silver is $12/ounce and the six-month futures price is $11/ounce. By buying the futures contract, Company X can lock in a price of $11/ounce. This reduces the company's risk because it will be able close its futures position and buy 20,000 ounces of silver for $11/ounce in six months.
If a company knows that it will be selling a certain item, it should take a short position in a futures contract to hedge its position. For example, Company X must fulfill a contract in six months that requires it to sell 20,000 ounces of silver. Assume the spot price for silver is $12/ounce and the futures price is $11/ounce. Company X would short futures contracts on silver and close out the futures position in six months. In this case, the company has reduced its risk by ensuring that it will receive $11 for each ounce of silver it sells.
Futures contracts can be very useful in limiting the risk exposure that an investor has in a trade. The main advantage of participating in a futures contract is that it removes the uncertainty about the future price of an item. By locking in a price for which you are able to buy or sell a particular item, companies are able to eliminate the ambiguity having to do with expected expenses and profits.
Example : Hedging Against Downside Risk:Strike Cost Est. Returnreturn (19) – put Capital at Riskmarket – strike + put
125 4.2 14.8 27.01
130 5.2 13.8 23.01
135 6.3 12.7 19.11
140 7.7 11.3 15.51
In the example, buying puts at higher strike prices results in less capital at risk in the investment, but pushes the overall investment return downward.

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ForexGen Hedging Trading Methodology

Friday, November 21, 2008



For beginners in Forex trading, Forex hedging is always a very good tool to be utilized in order to avoid from suffering a huge amount of losses in their early stage of investment. Forex hedging is a way of reducing some of the risk involved in holding an open position. There are many different circumstances in which a trader might wish to hedge. When someone mentions hedging, think of risk protection. A hedge is just a way of insuring an investment against risk. Therefore, it is most advisable for all of the investors, regardless of what type of investment they are in, to understand more about hedging because this is considerably one of the most effective way in order to protect themselves in Forex trading.

Forex hedging is much easier than other equity markets. In stocks, the simplest, but most expensive method is to buy a put option for the stock you own. (It\'s most expensive because you\'re buying insurance not only against market risk but against the risk of the specific security as well.) You can buy a put option on the market (like an OEX put) which will cover general market declines. You can also hedge by selling financial futures (e.g. the S&P 500 futures). Selling covered calls on your stocks is another option. However, in this case, you won't be completely covered.

ForexGen Trading Station

ForexGen Trading Station is the client's part of the online ForexGen Trading Platform. We provide all the needed trading tools for a successful trading. We attempt to supply the sufficient information and tools in order to make the Forex traders' decisions more appropriate and easy. The program has a simple and user friendly interface that allows traders to monitor their transactions and their account as well as performing technical analysis and develop Forex trading strategies of their own. ForexGen provides continuous real-time information and sophisticated technical analysis tools. ForexGen Trading platforms are stable, secure and characterized by its unique performance. It is the best solution for trading on Forex.

Bonus on Deposit in ForexGen

Wednesday, November 12, 2008


ForexGen sole aim is to make its clients reach the utmost satisfaction possible. It is not ramble, it is true and all our clients' testimonials are proofs on that.
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Foreign Currency Hedging Costs | ForexGen

Monday, November 10, 2008

When hedging forex, virtually all foreign currency hedging vehicles come at some cost. Carrying cost, option premium, margin and hedging P/L are all costs that may be associated with hedging forex. However, if you look at the foreign currency hedging cost from the proper perspective, you will most likely realize that the cost to place a forex hedge is relatively small compared to the protection forex hedging can provide. On the other hand, the whole point of placing a forex hedge is to offset forex market risk exposure at a reasonable cost - if a foreign currency hedging strategy is not cost effective then the investor should explore other options for managing forex market risk.

The cost to place a foreign currency hedge should be taken into account both before the forex hedge is placed, while the hedge is in place and again after the forex hedge is lifted. In theory, a foreign currency hedging strategy will almost always look fairly good on paper before the foreign currency hedge is placed. However, it is only after the foreign currency hedge has been placed and then lifted that the actual effect is realized. There is a learning curve involved in foreign currency hedging, and analysis and modification of the foreign currency hedging strategy are part of the learning process.

However, as ForexGen has the greatest providers and financial advisers, ForexGen was providing all clients with the best solution. ForexGen provided its clients with the best timeframe to trade their pairs. And because ForexGen cares for the benefit of its clients and because ForexGen seeks the general profit of all, ForexGen experts were making their studies and updating for it to help ForexGen sending the right time for ForexGen clients to perform their trading activity successfully without the loss of either ForexGen or the clients. And so, the majority of ForexGen clients avoided loss and great fluctuations happened at that time.

Types of Foreign Currency Hedging Vehicles | ForexGen

Below are some of the most common types of foreign currency hedging vehicles used in today's markets as a foreign currency hedge.

* Retail forex traders typically use foreign currency options as a forex hedging vehicle. Banks and commercials are more likely to use forwards, options, swaps, swaptions and other more complex derivatives to meet their specific forex hedging needs.

A. Spot Contracts.
A foreign currency contract to buy or sell at the current foreign currency rate, requiring settlement within two days.

As a foreign currency hedging vehicle, due to the short-term settlement date, spot contracts are not appropriate for many foreign currency hedging and trading strategies. Foreign currency spot contracts are more commonly used in combination with other types of foreign currency hedging vehicles when implementing a foreign currency hedging

For retail investors, in particular, the spot contract and its associated risk are often the underlying reason that a foreign currency hedge must be placed. The spot contract is more often a part of the reason to hedge foreign currency risk exposure rather than the foreign currency hedging solution.

B. Foreign Currency Options.
A financial foreign currency contract giving the buyer the right, but not the obligation, to purchase or sell a specific foreign currency contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign currency option buyer pays to the foreign currency option seller for the foreign currency option contract rights is called the option "premium."

A foreign currency option can be used as a foreign currency hedge for an open position in the foreign currency spot market. Foreign currency options can also be used in combination with other foreign currency spot and options contracts to create more complex foreign currency hedging strategies. There are many different foreign currency option strategies available to both commercial and retail investors.

If you would like detailed forex spot and option trading and hedging strategies, including strategy explanations, please click on the following link: Forex Trading and Hedging Strategies.

C. Interest Rate Options.
A financial interest rate contract giving the buyer the right, but not the obligation, to purchase or sell a specific interest rate contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the interest rate option buyer pays to the interest rate option seller for the foreign currency option contract rights is called the option "premium." Hedging currency risk exposure with interest rate option contracts are more often used by interest rate speculators, commercials and banks rather than by retail forex traders as a foreign currency hedging vehicle.

D. Interest Rate Swaps.
A financial interest rate contracts whereby the buyer and seller swap interest rate exposure over the term of the contract. The most common swap contract is the fixed-to-float swap whereby the swap buyer receives a floating rate from the swap seller, and the swap seller receives a fixed rate from the swap buyer. Other types of swap include fixed-to-fixed and float-to-float. Interest rate swaps are more often utilized by commercials to re-allocate interest rate risk exposure.

E. Currency Forwards & Swaps.
Currency forwards and swaps are more often used by institutions and commercials rather than by retail forex traders.

A foreign currency forward is a contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period. Foreign currency forward contracts are used as a foreign currency hedge when an investor has an obligation to either make or take a foreign currency payment at some point in the future. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched up, the investor has in effect "locked in" the exchange rate payment amount. * Important: Please note that forwards contracts are different than futures contracts. Foreign currency futures contracts have standard contract sizes, time periods, settlement procedures and are traded on regulated exchanges throughout the world. Foreign currency forwards contracts may have different contract sizes, time periods and settlement procedures than futures contracts. Foreign currency forwards contracts are considered over-the-counter (OTC) due to the fact that there is no centralized trading location and transactions are conducted directly between parties via telephone and online trading platforms at thousands of locations worldwide.

A currency swap is a financial foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate. The buyer and seller exchange fixed or floating rate interest payments in their respective swapped currencies over the term of the contract. At maturity, the principal amount is effectively re-swapped at a predetermined exchange rate so that the parties end up with their original currencies.

However, as ForexGen has the greatest providers and financial advisers, ForexGen was providing all clients with the best solution. ForexGen provided its clients with the best timeframe to trade their pairs. And because ForexGen cares for the benefit of its clients and because ForexGen seeks the general profit of all, ForexGen experts were making their studies and updating for it to help ForexGen sending the right time for ForexGen clients to perform their trading activity successfully without the loss of either ForexGen or the clients. And so, the majority of ForexGen clients avoided loss and great fluctuations happened at that time.

The Opportunities of Trading the Forex Hedged Grid System

Friday, November 7, 2008

I have seen the hedged grid system been used successfully (and highly unsuccessfully) over the last few years. Unfortunately the failures tend to discourage traders from taking advantage of this great system. I have found that the failures are mainly due to ignorance, impatience and greed (common reasons for trading failure).

In a nutshell the grid system uses the following methodology. You start by buying and selling a currency. When the price moves a predetermined distance (grid leg) you cash in the positive leg, leave the negative leg and buy and sell again. Sooner or later the system goes positive and you would then cash in when it is positive.

This is a brief summary of the content of our free forex hedged grid trading course available on expert-4x.com. Please refer to this course for more details of how money is made. The attraction is that the system is reasonably mechanical, can be programmed and does not take much supervision as exclusively entry orders are used.

Money is made when the price retraces 100%, 50%, 33% at various levels. This starts looking like a strategy that supports the Fibonacci concept. The grid system is also based on the nature of the market to trade sideways 80% of the time and to trend 20% of the time.

The dangers are that what if the price does not retrace and continues to trend. The Grid system can not make money in a trending market — full stop. One has to realize that. You therefore need Strategies to minimize damage during these periods:-

Firstly I have found that the biggest mistake made by traders is that they select a very small grid leg sizes e.g. 20 to 30 pips. This is a recipe for disaster. The trick is to use big leg sizes between 150 and 300 pips. What this does is that it sometimes turns a trending phase into movement in a sideways market. I would typically use 300 pips for the GBPJPY and 150 pips for the EURUSD for instance.

Secondly there is no rule that says that the legs have to be the same size. So I change my leg sizes in trending markets to be even bigger. If I started with 150 for the 1st leg I would go to 200 for the 2nd leg and 250 for the 3rd leg etc. This makes sure that I am carrying less loss making transactions in a trend.

Thirdly — sometimes it is wise to increase the number of lots with the trend compared to the numbers against the trend in a good trend. However be aware of having the same number of sell and buy transactions. All you will have done was lock in your current status in a 100% hedge.

Fourthly — This is the biggest change and most important one that I personally have made in my grid trading strategy. Always cash in all your transactions when your system is positive and when the price reaches the end of one of your grid legs. By cashing in you are reducing the risk of carrying negative lots in a trending market. This also gives you an opportunity to re-assess the market conditions.

Fifthly:- Cash in a start again is always an option. One of my strategies is to cash in all my open positions when the 3rd leg of my grid is reached and start again. Experience has taught me that this is a short term pain that goes away very quickly and is soon forgotten.

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ForexGen online trading services are available 24 hours a day from Sunday at 6:00pm EST to Friday at 2:00pm EST to support and offer the help needed by all ForexGen's clients through answering any questions they may have.
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You are encouraged to contact the dealing room by phone ONLY in these situations:

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Whenever the trader asks for trading support, our team checks if the trader has performed the trading factually in order to facilitate the trading process and make it faster.

Forex Hedging Strategy

Thursday, November 6, 2008

The dollar fell below parity with the Swiss franc in March to 0.9987 Swiss francs. Then it overcame parity with the US dollar reaching 0.9644. As the dollar sell-off joined the increasing risk aversion, the franc gained its strength as a safe-haven currency. It is quite obvious now that Asian and European market can’t be separated from US’s slide, a slow retracement from the lows in USD started. USD/CHF price action is indicating a continuation for the fledgling bullish trend. With the pair trading just days before the markets expect to see May Non Farm Payrolls get lower -52k, there is a substantial possibility that the pair will retrace lower before a topside breakout is to materialize.

Hedging Strategy

Currency Pair: USDCHF

Long Term Bias: Bullish
Long Term Position: Holding Long

Short Term Bias: Bearish
Short Term Position: Short below 1.0490, Target 1.0290, Stop-Loss at 1.0540

Traders may consider a hedge short USD/CHF below 1.0490 with a target at 1.0290. If they hit the profit target, bullish trend might resume.

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The 4 Key Players in the Forex Market

When trades are conducted in the equity market, they are normally conducted with institutional investors (e.g. mutual funds
) or other individual investors. The Forex market operates differently in that there are additional players who trade for reasons that are different from that of the equity market. So for the purposes of educating the newcomers to the Forex market, the following is about the four key players in this arena.

Governments and Central Banks

Without a doubt, it could be strongly argued that the governments and central banks of the world's countries are the big players in the Forex market. Normally, the central bank is an extension of that country's government, and will usually formulate and regulate policy in conjunction of the government. There are governments that disagree with this, feeling that a centralized bank should be more of an independent entity.

The reasoning is that it could be more effective in the areas of curbing inflation rates and keeping interest rates down in the hopes of stimulating ongoing economic growth. But the government officials would still have the right to regular consulting privileges for the purpose of discussing monetary policy despite the banks independent platform.

Banks and Other Financial Institutions

Despite the depth of influence that governments and central banks exhibit, regular banks and other types of financial institutions are still a key factor in the Forex market in that they are available for those individuals who need to swap currencies in a small-scale type of transaction. So, they will deal with the neighborhood or local banks. However, these smaller scale transactions can't compare to the volume of the transactions that are conducted within the Forex market.

Oftentimes referred to as the interbank market, this is the area wherein larger banks conduct transactions with other similar banks as well as determine the exchange rates that traders see on the trading platforms. Electronic brokering methods that are based on credit transactions are the means with which these trades are conducted. Only those banks that have an established credit based relationship with one another can be involved in this type of activity.

Hedgers

Businesses dealing in international transactions are usually the banks biggest clients. Whether a client is purchasing from or selling to an international client, the transaction will always be subject to the volatility factors that influence the exchange rate. And if there is one thing that management or shareholders despise, it is the uncertainty factor. Normally, these individuals will offset this uncertainty by entering the spot market and make an immediate transaction to purchase the currency that they need.

Speculators

Speculators are another market participant involved in the Forex market. Speculators usually will attempt to make monetary gains by taking advantage of fluctuations in the exchange rates rather than hedging against the rates or exchanging currencies to fund their transactions. Hedge funds are considered to be some of the largest speculators in the Forex market. They are also considered the most controversial. A good analogy that was once used to describe hedge funds was "mutual funds on steroids."
Trading

The Foreign Exchange currency market is known as FX. It is the simultaneous buying of one currency and selling another, currencies are traded and exchanged in pairs. Traders are all unified on one goal, making profit. Profits are produced when the prices move in the trader direction.

In the past, Forex markets were accessed only by larger financial institutes, investment banks, large multinational companies, global money managers, international currency dealers, and liquidity providers. Lately, online trading is offering trading platforms for each individual who wants to trade currencies in order to gain profit.

Margin Usage and Introduction to Forex Hedging

A good rule of thumb for either a mini-account or standard forex account
, is to limit your margin usage for each trade to 5% - 10% of your usable margin.

As an example, if your usable margin is $5000, to trade safely, limit your margin usage for each trade to a maximum of $250. This means trading only 1 full lot for each trade. This is assuming that you are trading in a CMS Universal account with 400:1 margin. Your use of margin is increased with a smaller ratio, as most other brokerages only offer a smaller ratio, normally 200:1 or even 100:1.

As your account grows and your usable margin grows, you can increase your margin usage and trade bigger mini or full lot sizes. If you lose money and your account shrinks, drop your margin usage back down to smaller sizes. You need to learn to keep your eye on your usable margin, especially if you've suffered some losses.

Protect your usable Margin by not having more than 2 open hedged or unhedged position at any one time. Your usable margin & equity will get eaten up by un-hedged open positions that go bad in the wrong direction...this is a really good reason why you want to use stops, and if you hedge, hedge tightly.

IMPORTANT: Don't just keep putting on positions because you think it's a good opportunity. First sell a position and book some usable margin before you put on another position.

NOTE: Hedging does not use up more margin! Use it to protect your equity & usable margin, esp. in an emergency situation!

If you break the hedging rules, and your positions go against you and you aren't properly hedged with stop losses, you'll quickly see your usable margin degrade. If it degrades enough so that your usable margin goes into the negative, you'll get a margin call. This means that the operators will automatically start selling some of your lots in your oldest losing positions in order to beef up your usable margin. This makes your unrealized loss become a realized loss...and the money is gone from your account.

If you lose too much useable margin, they won't even let you trade in your account, the message they'll give you when you try to put on a new trade is, 'Account in Untradeable Condition'.

If this happens, you might have an open position that needs to be hedged immediately or you might need to sell an old position. Or you might need to deposit more money into your account. Then you can start trading smaller lots to win back some usable margin.


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ForexGen customer satisfaction is our major objective. To reach our business goals, we strive to put our client's goals in focus. We highly value our clients and always aim to exceed their expectations and cross the limitations encountered by the sophistication of the Forex trading industry.

The ForexGen's provided services are all restricted and regulated by the international banking and financial regulatory standards. All our provided activities are supported by creativeness and modernization. Ambitious & motivated employees are working simultaneously to protect the customer's confidentiality. ForexGen is continuously providing the market's most competitive conditions.

Why Forex Hedging Is a Bad ‘Bet’ For Most

Tuesday, November 4, 2008

Forex hedging is not for beginners, nor for those without a significant pool of risk capital to invest. In fact, hedge funds - generally speaking - are not wise investments for the average person.

If you are just getting your feet wet in the investment game, you might be tempted towards Forex hedge funds. After all, a properly managed fund can yield returns higher than 500 percent - and even higher if you’re the fund manager. It is easy to see why a beginner could get sucked into this fairy-tale scenario.

My recommendation, however, is that you steer clear of hedging until you have several years of successful trading experience under your belt - not to mention disposable income - and I’m going to explain why right here and now.

First, let’s discuss hedge funds. What are they, exactly?

Hedge funds are private investment partnerships, usually managed by wealthy individuals - e.g. - other investors, business people, commodity pool operators and all-around financial tycoons.

However, the Securities and Exchange Commission does not impose any strict rules on who may start a hedge fund. In fact, if you won the lottery tomorrow, you could start your own hedge fund. This free-market, ‘anyone can play’ philosophy is the first high risk factor that should steer you clear of Forex hedging.

The second factor is the high risk associated with the strategies involved in hedge fund trading. You’ve probably heard about futures contracts, derivatives, ‘put’ options and the like, yes?

If you’ve been doing your homework, then you already know that these ‘investments’ revolve around the highly speculative trading strategy of ’selling short’. Really, this is why we call it ‘hedging’: you’re hedging your bets either for or against the given financial instrument based on short-term market fluctuations.

It is difficult enough for the average investor to predict short-term movements on every day stocks; but, try doing so on the even more volatile foreign exchange market and you’ll understand why Forex hedging is so risky.

It takes years of experience, coupled with a very sophisticated understanding of the world economy, to profit from a Forex-based hedge account, and even more to manage one.

So, if you are investing for your future, your family’s future, your children’s education or any other closely held dream, then I suggest you stick to the time-honored mid and long-range investment strategies like stocks, bonds and IRAs. There are plenty of high-yield options in the latter category, especially.

Live Accounts Contest

ForexGen has the pleasure to announce the launching of its first monthly Live Accounts contest,
This is NOT a demo contest

this is a live trading competition open for all live mini account holders. At the beginning of each month, the slate is wiped clean and traders have a new opportunity to win the monthly prizes.
What makes this contest unique?

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Forex Hedging Strategy - Protection against losses

Many Forex retail traders think that hedging is a good way to minimize losses. When holding on to a losing position, they often take up some form of hedging strategy to protect themselves against further capital depletion.

In this article I will discuss what a hedging strategy is, and why it’s a bad idea for retail traders to consider any type of hedging strategy at all… hedging is not for retail traders!
What Is Hedging?

Basically, hedging involves the buying (or selling) of currency pair(s) in order to protect the hedger against unwanted currency fluctuations. Traditionally, hedging was used to protect the profits of multinational companies from unfavourable currency fluctuations.

Hedging is a great way for these companies to protect their profits, but unfortunately many inexperienced Forex traders have incorrectly applied the same principles to their trading activities.

Here’s how a Forex trader may try to hedge his position:

Imagine that I buy the EUR/USD currency pair, and the market immediately moves against my position (i.e. prices went down). At this moment, I would be facing an unrealized loss. In order to ‘protect’ myself against further losses, I might sell the EUR/JPY currency pair in the hopes that any gain in the latter pair will partially offset the losses of the former pair.

Essentially, I’ll be holding on to two simultaneous ‘long’ and ‘short’ positions for the Euro currency. Hedgers hope that the results of both positions will partially cancel each other out.
Why Hedging is A Bad Idea for Retail Traders
This method of hedging is a deathtrap waiting to spring. The original purpose of a hedge was to reduce the uncertainty of company profits.

To the retail trader, however, this does the exact opposite!

Such a hedging strategy simply leaves too many factors open to risk. Although the Euro price fluctuations may be somewhat muted, the ‘retail hedger’ now has worry about the USD and JPY currencies too! The EUR/USD and EUR/JPY pairs are not highly correlated and may end up causing an even larger total loss in the end.

Many people like to hedge because they don’t want to admit that they made a bad trading decision. They try to ‘safely’ hold on to a losing position for as long as possible in this manner, but don’t realize that they’re actually exposing themselves to even greater risks!

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The Euro Bull: New Paradigm of FOREX

As the EUR/USD breaks 1.50, investors should take another look at foreign exchange. 100/barrel oil, $1,000 gold, and $10/bushel wheat are not anomalies, nor is there a bull market in commodities. The US dollar is losing its value and its relevance as a world reserve currency.

What determines the value of a dollar? The common belief is that purchasing power determines the value of money, which is partially correct, but that is not the entire story. In a world of floating currencies, money is also valued in terms of other money. Simply opening a bank account in Europe, and gaining a few % per annum interest, would have returned a US based investor over a 50% return in 5 years. There are a few ways to look at that, but they all point to the same conclusion: the value of the dollar is declining. The other logical observation is that by NOT investing in the Euro, an investor is actually LOSING 50%. This is a difficult mental leap for many to make as they don't see losses in their bank account, but as we see $4/gallon gas, $3/gallon milk and skyrocketing commodity prices, many are noticing. They only have to realize the simple fact: prices are not increasing the value of US Dollars is declining.

Who is not affected by a declining dollar? The poor, debtors, manual laborers, and tradesmen (because you can continue to perform your trade for dollars, pesos, or bananas if need be regardless of the continuing slide of the dollar ? tomorrow you may charge twice as much but so what?) But if you have any wealth; a house or a stock portfolio, denominated in dollars, the declining US Dollar should be the most important issue to you because that portfolio is losing value as the dollar does. In the worst case scenario, the Fed can default making US Dollars worthless overnight.

Best case, although unlikely it should be mentioned, the Fed could raise rates to 10%, Bush could declare a flat tax, open the borders to foreign investors by deregulation and providing tax incentives, pull out US Military from all foreign engagements, and be the banker of the world. This would catapult the US economy and the US Dollar to currently unimaginable success, but this is a farfetched fantasy. In reality, we are increasing our Military presence around the world, cutting interest rates, and regulating US markets, forcing even homegrown companies to look abroad.

Let's examine why the dollar is declining and what can potentially stop the decline.

The largest player in the US Dollar is clearly the Fed, the sole issuer of the US Dollar. Investment Banks and Hedge Funds, at the end of the day, rely on the Fed for regulation, clearing, liquidity, and currency controls; they are distributors and traders of US Dollars not the manufacturer. It clearly states on the Fed's website that the Fed conducts foreign currency operations in the open market, and maintains US holdings of foreign currency and swaps. This would indicate the Fed has the ability to intervene in currency markets in order to protect the strength of the dollar, and although the Fed may have that ability, it states in the same article that:

US monetary policy actions influence exchange rates. The dollar's exchange value in terms of other currencies is therefore one of the channels through which U.S. monetary policy affects the U.S. economy. If Federal Reserve actions raised U.S. interest rates, for instance, the foreign ex-change value of the dollar generally would rise. An increase in the foreign exchange value of the dollar, in turn, would raise the price in foreign currency of U.S. goods traded on world markets and lower the dollar price of goods imported into the United States. By restraining exports and boosting imports, these developments could lower output and price levels in the economy. In contrast, an increase in interest rates in a foreign country could raise worldwide demand for assets denominated in that country's currency and thereby reduce the dollar's value in terms of that currency. Other things being equal, U.S. output and price levels would tend to increase must the opposite of what happens when U.S. interest rates rise.

The Fed therefore officially controls exchange rates of the US Dollar through Monetary Policy. The Fed, in response to a weakening US economy and a Subprime crisis, has taken an aggressive policy of cutting interest rates, thus dropping the dollar.

So we cannot expect the Fed to solve the weak dollar issue, because they are the creators of it! The Fed could start aggressively raising interest rates and we could see the dollar soar to new highs. But there is a low chance of that happening, as they have indicated the contrary. As the credit crisis unravels, we can expect the Fed to continue cutting rates. With a weak stock market, a weak real estate market, and a weak economy, we can expect more doom and gloom before we see the light at the end of the tunnel, and in the meantime the US Dollar can sink another 80% or more, as the Great British Pound did when it lost its status as reserve currency.

Technically, once a downward spiral starts in currency, it is very difficult to stop. In stocks, an issuer can buy back shares in order to dry up liquidity and stabilize the price; a common practice among penny stocks listed on pink sheets. However if the US Dollar declines, the Fed would need Euros in order to buy back US Dollars, and since the Fed is not an issuer of Euros, it would take a near act of God to convince the ECB to loan the trillions necessary to support the dollar in the event of a default or run on the banks. While the Fed does have some mechanisms in place to stabilize the markets, the act of supporting your own currency is like pulling yourself out of a sinkhole by your own hair. Once the selling starts, it could feed on itself and create a downward spiral ? as the value goes down more large holders, worried about further losses, may panic and sell, thus adding fuel to the fire.

It would be anything but capitalism if we didn't profit from this once in a lifetime opportunity of a declining dollar. On one hand, wealth will be wiped out en masse ?on the other, it will be created. A transfer of paper wealth from USD to Euro and other currencies is inevitable; why be on the wrong side of the fence? Germans, Argentineans, Japanese, French, British, Italians, Turks, and many others, can attest to the events surrounding currency collapse and hyper inflation. They say it cannot happen to USA because of the TBTF Too Big to Fail Policy, a fallacious reasoning that came out of a Senate hearing on banking regulation.

All the facts and economic data point to massive dollar sell-off look at a USD/CHF chart and you can plainly see it has already started.
FX as an asset class
There are many ways to invest in FX as an asset, but this should be done only with the help of a qualified professional or someone with experience in FX. Everbank offers foreign currency CD's and foreign currency deposit accounts: https://www.everbank.com/ This will not excite most investors but at least you can have non-dollar denominated deposits insured by the FDIC.

For a more versatile approach, CTA's offer FOREX Managed Accounts, usually with minimums starting at $10,000. These accounts are pure FX trading strategies, some are extremely conservative and others are extremely aggressive. Various strategies can be implemented on these accounts which vary from simple news and economic analysis by traders with 20 years experience, to fully automated quant systems.


The Merk Hard Currency Fund (MERKX) is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. Many consumers are aware of the falling dollar but don't know how to protect their capital against its decline. Others are uncomfortable choosing specific foreign currencies to invest in or investing in currency derivatives. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks-with the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market.

Hedge Funds are another venue for FX investing, but they typically have a $1 Million minimum and employ risky strategies.

FX Overlay

If a business or portfolio has exposure to multiple currencies, a hedging program can be implemented that combines multiple strategies to deal with currency risk. Large corporations such as Intel may have their own treasury desks, but smaller companies or financial firms may not have the resources or knowledge in place to justify such programs, however there are many companies who offer this service, or it could be built using proven models from the ground up.

ForexGen.com is an online trading service provider supplying a unique and individualized service to Forex traders worldwide. We are dedicated to absolutely provide the best online trading services in the Forex market.

ForexGen provides a unique online trading experience based on our intelligent online Forex trading package, the ForexGen Trading Station, including the best online trading system.

ForexGen serves both private and institutional clients. We have a strong commitment to maintain a long term relationship with our clients.

Is It Really Any Help On Forex Hedge Trading ?

Monday, November 3, 2008


Some Forex retail traders after incurring significant losses on equity trades try later to hedge against any further losses. On the surface it appears to be a good strategy to minimize losses. But in many such instances a policy of hedging fails to help. In this article, we would try to see how it happens.

What Exactly is Hedging?

Hedging in trades with purely financial implications is comparable to taking insurance policies against loss of inventories and properties from fire, or to cover loss of earning capacity due to unexpected injury, sickness or death.

To explain the concept of hedging further, let us take an example of a currency trade. Suppose you trade long on EUR/USD at a rate of 1.4595 and suddenly the rate plummets to 1.4565 incurring you a loss of 30 pips. So you enter into another contract to cover yourself against such further losses, shorting at the current market rate of 1.4565. By doing so you ensure that you will not lose anymore even if the rate falls by a further 10 pips to 1.4555. In this scenario, you would lose 10 pips on your first long trade and gain 10 pips on your subsequent short trade thus neutralizing each other to leave you in a no loss/no win position.

The Hidden Implications of This Type of Hedging:

At a glance, hedging appears to be a bright idea; which is the impression that inexperienced traders invariably get. It would appear that hedging effectively shields the investor from incurring further losses, while there is also the possibility of the rate to readjust in his favor in the meantime. This is the precise misconception that leads many investors to misguidedly fall into a trap of contracting such hedging trades.

The Problem of This Type of Hedging Unraveled:

Assume that the price turns around to the original level of 1.4595. Still you could be losing 30 pips! How?

To start with, you went long at 1.4595, (the current price prevailing then), which makes you to breakeven. But your subsequent short trade that you entered at 1.4565 would be incurring you an unrealizable loss of 30 pips. So, on the latest position, while you breakeven on your first long trade, you make an unrealizable loss of 30 pips on your second short trade, giving you a net loss of 30 pips on the whole. That is in addition to the extra transaction fees etc. you incurred on your bid/ask spread on the hedge.

Had you not entered into the second trade as a hedge, you would now enjoy a breakeven, no loss/no win position with prospects of earning profits, if the upward trend of the Euro continues. On the other hand you will incur further unrealizable losses as the Euro price rises as things stand now due to the second trade that was done as a hedge against possible losses on your initial long trade.

ForexGen Trading Station
ForexGen Trading Station is the client's part of the online ForexGen Trading Platform. We provide all the needed trading tools for a successful trading. We attempt to supply the sufficient information and tools in order to make the Forex traders' decisions more appropriate and easy. The program has a simple and user friendly interface that allows traders to monitor their transactions and their account as well as performing technical analysis and develop Forex trading strategies of their own. ForexGen provides continuous real-time information and sophisticated technical analysis tools. ForexGen Trading platforms are stable, secure and characterized by its unique performance. It is the best solution for trading on Forex.

The ForexGen Trading Station is our clients' gateway to the world's Foreign Exchange and Bullion markets. We have chosen the ForexGen Trading Station as our solution for the professional trader because in our opinion, it is the most reliable, professional and secure online trading software on the market at the current time.

Risks involved in Forex hedge trading

Forex Hedging is a good instrument for the beginners in Forex trading, if they wish to avoid incurring huge loss. With forex hedging you can minimize the risk in holding an open position. There are several situations that may prompt a forex trader to hedge. It can be implied in simple terms as a protection against risk. By hedging you can insure your investment against risk.

The concept of hedging is applied on every investment opportunities. Forex hedging however is much simple than other equity markets. For stocks, it is very expensive as it involves buying a put option for the stocks that is buying indemnity against market risk plus the specific security. Compared to this forex hedging is a much simpler operation.

For example, if a trader takes long on the JPY/USD on a specific month’s first Thursday, as he or she knows that Non-Farm payroll is generally released on first Friday of every month. In this case the trader takes a long-term with the thought that the market may move violently. As in Forex there is no long bias to the market the trader can open long and short positions quite easily. For hedging his or her position and for eliminate the risk involving economic release, the trader will have to open numerous short JPY/USD positions as they currently have long. This will insure the trader against risk immediately.

Hedging, in many cases, involves complex financial instrument like common derivative including future and options. With these, one can offset losses by gaining in derivatives. If you are involved in a business that needs frequent currency conversion you must take help of hedging to protect your profit. For example you manufacture a machine in USA and sell it in the UK market. So you need a conversion of USD to GBP during every transaction. But due to continuous fluctuation in the forex market, you get variable rates every time. To ensure your profit, you must hedge and fix the rate of conversion between USD and GBP. Options and future contracts come handy in hedging in Forex trading.

The concept of hedging is very useful for the traders but it has downside too. It works favorably for an investor only if he or she suffers a loss. Otherwise it is not going to help the trader in any way.
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