Currency risk

Beginners entering the financial markets, such as forex, stock market shares, hear a lot of incomprehensible terms for themselves. Hedging is one of them. For successful work in the market, it is not enough to choose a broker, to learn terminology, it is necessary to apply the received knowledge in practice.   Unfortunately, for many newcomers, concepts such as hedging and diversification remain just concepts from the online trading course, and this is one of the key elements of risk management. If you do not understand this issue, then no, even the best Forex broker will not save you from losses.   If you are trying to make money on exchange rates that are changing constantly, you are always at risk. Currency risk is the risk of receiving a loss from a transaction due to an adverse change in the exchange rate of one of the currencies in a pair.   Under the hedge (hedge - insurance, guarantee) is understood the insurance of investments from the future of sharp price changes. It can be implemented if the assets to be acquired are opposite to those already available. By taking such measures, the trader reduces his risks by fixing the capital in a certain position. Suppose that the currency depreciates, and the price of another asset starts to grow and vice versa. What happens to the capital? Its amount remains unchanged. You saved it.   Hedging is simply indispensable not only for traders but also for companies and large investors. And the larger is the capital, the more it needs to hedge. Therefore, the number of hedge funds in which trillions of dollars are located is growing rapidly around the world.   What is the importance of hedging?   Exchange rates are constantly changing, so the actual value of any commodity also changing over time. Because of this, a deal that previously seemed profitable may become unprofitable. And companies want to be insured against such situations.   Hedging allows the company not to depend on the sharp fluctuations in exchange rates, which allows you to plan your activities, assign fair prices for your goods, forecast profits and look with confidence in tomorrow.   Hedging of financial risks appeared on the stock market, but over time it gained influence in the market of currencies. This is a rather complicated process, therefore it attracts the attention of solid hedge funds together with large investors. Hedging is useful for any trader who needs to learn its basics, try to apply established methods of work.   What is the need for hedging in the trader's work?   He needs a certain degree of investment security for profit when escorting his position. Here is a small example in which you need to manage risk. The trader analyzed the data of a certain indicator and conducts a deal on a certain pair of currencies. Everything seems to be good. The profit has been received several times, but suddenly the price starts to decrease, the movement goes down within a day and brings losses. Hedging positions is a good solution for this situation.   Many traders do not always correctly understand hedging. For example, they believe that locks in open positions, which are created by opening an order in the opposite direction for the same pair of currencies, is a hedge. With such a strategy, one of the positions will lead to profit regardless of the movement of the price. Therefore, it is considered that this is an effective method of protection against possible risks. But this method can be attributed to hedging only if a positive lock was put up, and some of the profit was recorded. In other situations, this method is ineffective and complex.   Meanwhile, the main method of protection should be considered the balance of open positions. It is achieved through the diversification of funds. You open a similar position for a pair that is heavily dependent on your losing pair or the opposite position on a pair that moves in the same way with your losing pair. But you should not open a position for the same currency pair. In this process, there are many subtleties: opening deals should be made with an equal volume, regardless of the difference in value, also, one should strive to ensure that the second pair does not contain a currency that brings a loss in your unprofitable pair, etc.