Hedging is possibly the most misunderstood trading method in the world.
It’s also technically not allowed in U.S.-based accounts, so many traders think that there’s something wrong with this trading method.
But if you take a closer look, there are many benefits to Forex hedging that I’ll go over in this article.
You might just change your mind.
Even though there are a lot of benefits to hedging, remember that there are no magic trading strategies that are guaranteed to make money.
The trading strategy you use must match your trading personality and be practiced extensively to achieve mastery.
With that said, let’s get into it.
1. Less or No Margin Required
Depending on the broker you use, a fully hedged position can require half the amount of margin, or even no margin at all.
For example, let’s say that you’re long 1 standard lot of EURUSD, and short 1 standard lot, at the same time.
If the margin for 1 standard lot is $250, you might only have to put up $250 for BOTH positions, which would ordinarily cost you $500.
At some brokers, you don’t need any margin at all if you have a fully hedged (1:1) position.
This is a big advantage because you can basically have double the opportunities to profit, at half the cost.
Of course, there is also twice the opportunity to have a loss.
But if you know what you’re doing and have practiced your hedging strategy, using less margin is generally a very good thing.
It gives you more opportunity to get out of losing trades.
Unfortunately, this does not apply if you hedge in a U.S.-based account. But it’s still possible to hedge in an account based in the U.S.
More on that in a bit.
2. Potential to Make Money in Both Directions
Almost all trading strategies require that you to pick the direction that you think the market will go.
It’s either up or down.
But with hedging, I can potentially make money in both directions.
I’ve even done demonstrations where I have opened a long and a short trade at the same time and made a net profit on both trades.
In this way, it’s unlike any other trading method out there.
Now in all fairness, this can lead to overtrading, so it’s important to learn hedging in a demo or simulation account before ever risking real money.
However, hedging gives me more opportunities, and that makes my job easier.
If you want to learn more about hedging, be sure to read my Hedging Guide for Beginners.
3. The Ability to Wait for More Information
This is a big one.
Have you ever thought that price would move in one direction, but as you saw more candles, it was pretty obvious that you were wrong about your initial prediction?
Of course, that happens all the time in trading.
The beauty of hedging is that I can take positions in both directions and wait until the market gives me solid clues that it will go in one direction or the other.
This can be a huge advantage because many times the markets will throw a “fake out” before making a big move in the opposite direction.
Even though I might be very sure about the initial position, that picture can change quickly and hedging gives me the ability to adjust.
4. Lower Stress
Sometimes I don’t feel like trading.
When that happens, I can simply hedge my positions and get back to them when I feel like it.
Sure, I’ll lose a bit of money on the swap.
But the ability to take a break is priceless.
Try doing that with any other trading method out there.
On top of that, I never have the stress of worrying if I’ll get stopped out of a trade…even during rollover.
If you’ve been trading for any length of time, you know that sinking feeling when you go to check your charts and you’ve just been stopped out…again.
Not the best way to start the day.
Get stopped out multiple times in a row and that can start to mess with your confidence.
With hedging, there are no stop losses, so I never have to worry about getting stopped out.
I simply hedge the losing position and move on.
A hedge still limits my risk, while giving me the opportunity to profit in either direction.
5. Potential to Make Passive Income
There was a period of time when the Japanese Yen was a popular currency to trade because the interest rate differential between the Yen and the US dollar was so high that traders could simply profit from the interest.
Traders were making big money by just holding their positions.
It was rumored that even Japanese housewives were trading this method because it was so easy and reliable.
I know a trader who did this full time as her only strategy.
But all good things come to an end and the trade eventually stopped working.
Some traders lost their entire accounts.
However, if you use hedging to target high interest rate differential trades, it’s possible to still take advantage of this method on a shorter term basis, while limiting your risk.
6. Massive Liquidity and Lower Fees
One of the reasons why I prefer Forex hedging is because the market is massive.
Forex is the largest trading market in the world.
Since there are more traders to take the other side of your trade, you are more likely to get the price on your screen and suffer less slippage.
Other markets like futures, options and crypto have much less liquidity, which means that you might not get the price you want or you may not even be able to enter a trade at all.
On top of that, Forex generally has lower transaction costs than other markets, especially at smaller trade sizes.
So it’s perfect for a wide range of traders, from beginner to professional.
7. Maximum Flexibility
Pairing hedging with scaling is powerful.
Scaling is opening and closing trades in parts instead of taking the whole trade in one big chunk.
For example let’s say that I want to take a full-sized trade of 3 standard lots.
Instead of opening the trade with all 3 lots at once, I might take 1 lot to start, then see what the market does.
If price doesn’t do what I expected, I can just hedge the 1 lot, instead of having to hedge 3 lots.
Scaling into a trade can also help me get a better average price than entering all at once.
I can enter 1 lot to start, then see what price does. If price action is still favorable, but moves slightly against me, I can enter trades 2 and 3, but at a lower cost than the first trade.
The same thing goes for my exits.
I can set 3 profit targets to capture a small, medium and large profit.
If my last profit target doesn’t get hit and it looks like price will return to my entry, I can simply close out the trade at a smaller than expected profit.
Now double this potential on both the long and short sides.
As you can see, when I use hedging and scaling together, it gives me maximum flexibility to go with the flow of the markets.
8. Can be Added to Other Trading Strategies
Hedging can be a trading strategy in itself.
However, if you couple it with other trading strategies, it can be a powerful way to get out of trades that don’t work out.
This is especially useful if you have a trading strategy that has a high win rate, but you want to boost the overall return of the method.
If a trade doesn’t work out according to the rules of your strategy, you can work your way out of it with a hedge.
Again, you have to master your hedging “escape” method before you ever take a trade.
But it can be a nice addition to an already profitable strategy.
9. More Consistent Returns
I have personally found that hedging creates more consistent returns than most other trading strategies.
Individual results will obviously vary, depending on skill level.
I’m not saying that you are guaranteed have more consistent returns, but in my experience, it’s certainly possible.
Couple this with lower stress and more flexibility, and that’s why I enjoy hedging.
10. Can be Done in a U.S.-Based Forex Account
Contrary to popular belief, you CAN legally hedge in a U.S. Forex account.
It’s not hedging in a traditional sense, but it’s effectively the same thing.
Hedging in the U.S. is not as easy and it does take more patience, but it can be done.
I DO NOT recommended it, but if you insist on using a broker in the United States, then just know that it is possible.
Final Thoughts
Just like with any other trading method, there are benefits and downsides to Forex Hedging.
It’s not for everyone.
But if this list of benefits appeals to you, then read my free Forex Hedging Guide to get started with this underrated trading method further.
As always, remember to start in a demo account and use play money to perfect your skills before ever risking real money.
