Do forex brokers allow hedging?
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This beginner friendly guide explores if forex brokers allow hedging. We explain what hedging is in forex and look at the best platforms that allow it. Read on to learn more and compare the best brokers that let you hedge your forex trades.
What is hedging in forex?
It’s a strategy that involves an additional buy or sell trade of an open position to offset risk and future price fluctuations. The simplest way to hedge a forex trade is to buy or sell a pair and immediately open another buy or sell in the opposite direction. Hedging can be used as an insurance policy although is best suited to those with strong trading experience.
Hedging is mostly used by large institutions and organisations as a way to mitigate exposure to currency fluctuations. Many retail participants also incorporate hedging into their trading strategies.
There are multiple ways to use hedging strategies while trading forex. These methods can be simple or complex and can involve multiple currency pairs at the same time. Hedging can be used on MT4 forex brokers as well as those that employ scalping or day trading strategies.
Do forex brokers allow hedging?
Yes, the majority of them do. Hedging is not illegal and most of the best forex brokers allow it, although there are some platforms where it is strictly prohibited. In the United States for example, regulatory policies that consist of FIFO (First In First Out) mean hedging is not possible.
As its name suggests, First In First Out requires a trader to close their first and oldest trade before they can open another for the same currency pair. This means hedging is virtually impossible for forex traders in the US. However, using correlated currencies is a way around the rules, albeit a more complicated way to hedge.
What are the best brokers to use that allow hedging?
The table below includes a selection of the top forex trading platforms that allow hedging. They have all been selected by our trading experts and are some of the best brokers around. Click on any of the links to get started in minutes.
Forex hedging strategies
Most traders who use hedging in their forex trades do so to preserve profits for an already opened trade. Others initially open trades in both directions to remain neutral until a move in either direction occurs. Below is a brief explanation of a couple of different forex hedging strategies.
- Simple hedging. This type of strategy is the most basic way to hedge and involves opening an opposing trade to an already open position. Also known as a direct hedge this strategy allows traders to profit from trend reversals if the market moves against the initial entry.
- Complex hedging. Using this strategy requires opening trades in opposite directions for two correlated currency pairs. When using multiple pairs, the aim is to hedge your exposure to a specific currency. Multiple pair hedging can be risky and it is possible you could lose money on both positions.
Advantages and disadvantages of forex hedging
Using hedging strategies while trading forex can help with minimising risk and has lots of advantages. Although there are some downsides to hedging, it’s not always the best option to use. Here’s a brief explanation of the benefits and risks of forex hedging:
- Hedging your trades can act as an insurance policy against volatility and wild price swings
- You can preserve gains you’ve already made
- When hedging you can have better control over your risk/reward ratio
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