If you are somebody who is just getting started with Forex trading, then you really need to take the time to understand how hedging can not only mitigate your risk, but also potentially improve your long-term profitability.
When we talk about hedging, we are talking about employing trading tactics and techniques that essentially enable you to profit regardless of how a particular underlying trade turns out. For example, think about it this way. Imagine that you have car insurance. You pay money for having his car insurance. However, if you are in an accident, you don't have to pay as much money as you would have if you didn't have the insurance. In some ways, that is very similar to the process involved with hedging your foreign currency trades.
Some people really do not like the idea of employing hedging techniques. They feel as if though these techniques limit their upside. Well that is sometimes true, what most of these people do not realize is that the most successful people who are still involved in the Forex market today are those who learned how to limit the amount of money that they would lose even if it meant tapping the amount of money they could potentially make. That may not make the most sense, but you need to realize that the people who have been playing the Forex game for a long time understand that the name of the game is capital preservation.
Once you have a very clear idea of the kind of trading system you are going to be using, you really need to stop and think about the hedging strategies that you are can use to make sure that you don't get wiped out on one particularly bad trade. The general rule of thumb that a lot of experienced Forex traders swear by is to ensure that you have a hedging system in place that limits your downside risk to 10% of the amount of money you are speculating with.
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