Nada Yoga › Forum › Principale › NadaYoga › Best Hedging Strategies

xysoom · Registrato: Mag 15, 2020 Messaggi: 1676

Best Hedging Strategies - 4 pillars of Profit

Hedging strategies help traders mitigate risks and protect trading accounts from losses. Discover the best hedging strategies to profit from forex. 6 May 2010 was a normal day for the markets. In the UK, residents were going to an election while in Wall Street, the only concern among traders was the Greek debt crisis. Then, in the afternoon, something unusual happened. All of a sudden and without any major news headline, US markets tanked with the Dow shedding more than 1,000 points. This event is now known as the flash crash.To get more news about [url=https://www.wikifx.com/za_en/]WikiFX[/url], you can visit wikifx.com official website.

A similar decline in the worlds markets happened in January 2015 when the Swiss National Bank (SNB) unpegged the franc from the dollar. It was a surprising move because no one expected it.

Those unexpected events are not common but when they happen, traders and investors lose billions of dollars. Unlike other major events such as Brexit and global elections, no one can predict when these events will happen. This brings the need for proper risk management strategies in anticipation for such happenings.

A good way to minimise the risk is through hedging. Hedging is the practice of minimising risks by opening multiple trades and benefiting from the spread between the profit and loss. Here are some of the best hedging strategies you can use.

Opening two trades of the same security

Opening two trades of the same symbol is a safe way of hedging the risks in the market. For example, assume that the EUR/USD pair is trading at 1.1200. After doing your analysis, you find that the pair could gain 10 pips and reach the 1.1210. So, you decide to buy one lot of the pair, with the take profit at 1.1210 level. To reduce the risks, you can decide to sell half a lot of the pair. If the trade goes right, your bigger buy trade will be profitable, but the smaller sell trade will make a loss. In this case, your profit will be the spread between the profit and loss of the trade. On the other hand, if the pair goes down, your bigger trade will make a loss, which will be offset by the profit on the smaller trade.

Trading the safe havens

A few currencies and securities are regarded as safe havens. The assumption is that traders tend to move to them when risks increase. The Japanese Yen is regarded as a haven because of the massive external treasuries the Bank of Japan (BOJ) holds overseas. It is the second largest holder of US treasuries after China. For this reason, the yen always gains even when North Korea fires missiles above Japan.

The Swiss franc is also regarded as a haven partly because of the stability of the Swiss economy and the strength of the Swiss financial system. A study by a group of economists from Bundesbank for the period between 1986 and 2012 found that the Swiss franc tended to appreciate during periods of increased volatility.

Multi-asset correlations

Another way to hedge against risk is to apply the concept of correlations. This concept emerges because of the various relationships that exist between different assets. Closely correlated assets move in the same direction while inversely correlated assets usually move in the opposite direction.

A good example of historically inversely-correlated securities is between the US dollar and gold. Gold is a metal used mostly for investment purposes and is always quoted in dollar terms. Therefore, when the dollar rises, gold tends to fall and when the dollar falls, gold tends to rise. Between January 2018 and mid-August of 2018, the dollar index had gained by more than 5% while gold had fallen by more than 4%.

Near-perfect correlations happen in other securities too. For example, because of the close relations in crude oil supply, the price of Brent – the global benchmark – and West Texas Intermediate (WTI) move in a similar direction. In the period above, Brent and WTI had gained by about 7%.

Currency imbalances create good hedging opportunities for traders. In the case of crude oil, a bullish trader can buy the expensive Brent futures while selling the relatively cheaper WTI crude. If the price of oil moves higher, the Brent trade will be profitable while the WTI trade will move lower. The profit will therefore be the profit of the Brent minus the loss of the WTI.

The same strategy can be used in inversely-correlated pairs like gold and the dollar. A trader bullish on the dollar can hedge the trade by selling short gold futures. An easy way of finding correlations between securities is to fill their closing prices in Microsoft Excel and then to execute a correlation function.