Hedging is a risk management strategy where a trader opens a position to offset potential losses in another position. In forex, this often means holding simultaneous long and short positions on the same or correlated pairs. Hedging reduces directional exposure but does not eliminate risk entirely.
You are long 1 lot of EUR/USD but are concerned about a pending ECB announcement. You open a short 0.5 lot position on EUR/USD as a partial hedge. If the price drops, your short position partially offsets the loss on your long position.
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