Using a defensive trading strategy when investing in the Forex market can help not only to reduce the risk you might incur but help to protect any profit you make. Plus through use of such a strategy you are helping to reduce losses when trading on this particular financial market.
A defensive Forex trading strategy is more commonly referred to as hedging. It requires you to open to positions that are in fact contrary to the pair of currencies you are trading with. It is quite an advance technique to use and therefore isn’t one that those first getting involved with this particular market should consider using until they have a better understanding of how the Forex market works.
In fact it is best that only traders who have quite large sums of money invested in this market should be the ones who use it. The reason we recommend this is that normally Forex traders will need to be willing to sacrifice some of the profit they are potentially likely to earn to make sure that the money they do invest is protected if anything untoward should occur.
If you are at all interested in getting involved with Forex hedging there are certain steps that will need to be followed. Below we take a look at what we consider to be the main ones.
Step 1 – Risk Analysis
Those who choose to get involved with Forex hedge trading only do so because there is an unusual level of risk involved or where this level has changed. Therefore it is important that before you even consider using such a strategy as this for trading on the FX market you calculate what the existing risk is.
Step 2 – Deduct Risk Tolerance
This is the normal risk level you will expect to see on any trade you make on the Forex market and will also help to determine the amount of loss you should be prepared for. By deducting this amount from the total risk you are then able to eliminate the excess risk through use of a Forex hedging strategy.
Step 3 – Select A Hedging Strategy
In order to decide which Forex hedging strategy to use you need to consider those available. Look closely not only how effective each strategy is but also how much each one costs.
Step 4 – Act
After doing plenty of research and having chosen a particular Forex hedging strategy to use, now is the time to then implement it. Once you start using any of these strategies make sure that you keep a close eye on what is happening in relation to the Forex market. If you notice that the market has begun to change then this would be a suitable time to either close part of the position you originally opened in order to make ensure that you achieve much better results.
Be aware however that although Forex hedging strategies won’t always be the most effective way of seeing a good return on your investment. You will find that they are certainly effective when used in certain situations when trading on the Forex market.