Hedging
Hedging involves taking a position in one market to offset potential losses in another. It’s like having insurance for your trades. While it can be complex, it’s a powerful tool to protect against adverse price movements.
Exercise
Objective: use hedging to protect against potential losses.
Scenario: you’re holding a long position in GBP/USD and want to protect it against a downturn.
Steps:
Identify the position. Note your long position in GBP/USD at 1.3000.
Open a hedge. Enter a short position in GBP/USD at the same size.
Set stop-loss for hedge. Decide where to place your stop-loss for the short position.
Monitor both positions. Watch how the market moves and how your hedge affects your overall risk.
Close hedge when needed. If the market moves in your favor, close the hedge to lock in profits.
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