When you study forex trading more deeply, hedging will look tempting to try. Basically, hedging strategy is taking the same two trading positions but in different pairs, or vice versa.
The purpose of hedging is to offset losses in the first position, with profits received from other positions. Some professional traders even practice hedging as a strategy to protect accounts from Margin Calls.
One interesting hedging technique to learn is to take advantage of the difference between interest rates or arbitration. This technique, termed 100% hedging, is touted as a profitable strategy because it minimizes risk.
100% Hedging Mechanism
According to Earn Forex, hedging is holding two or more positions at the same time, where the purpose is to offset the losses in the first position by the gains received from the other position.
To carry out a 100% hedging strategy, you need 2 brokers with different swap policies. You must choose a broker that gives you both a negative and a positive swap. By using this technique, you will benefit when positive interest occurs.
Then, you have to use 1 other broker that applies Swap Free. Thus, you don’t need to pay interest when you hold a position.
Next, open the same position at the 2 forex brokers. Another term for trading using interest differences like this is Carry Trade.
To carry out Carry Trade, you should make sure that you place a position in a major currency with a stable exchange rate. The aim is to make it easier to determine market players who put positions against us.
The amount of swap charged varies from 1 broker to another broker. Thus, you should pay close attention to the amount of interest the broker will use.
Problems that often Appear in 100% Hedging
Requires large capital
The 100% hedging strategy requires a large number of funds, a minimum of 10,000 USD. The reason is that your capital resilience must be strong for hold for days, even weeks.
If only 1-2 days have closed, you certainly only get little benefits. That is why this kind of hedging strategy is mostly done by professional traders with large funds.
For traders who are often impatient and anxious, a 100% Hedging strategy would be very torturous. This is because you have to force the Hold position for a long time. Instead of letting profits accumulate, there might even be a feeling of wanting to add a position or overtrade and damage the strategy that has been laid out.
Risk management is more complicated
Third, a 100% hedging strategy requires more complicated risk management. For example, if you use 1 regular lot, the cost will be around 145 USD.
Thus, you will lose 145 USD in the beginning and need the first 6 days just to cover the spread costs. If you get a Margin Call, you will need to close some positions. Then, you should transfer money to another account and reopen the position.
Therefore, it is very important to avoid Margin Calls so that you can maintain equity. Another obstacle that makes the strategy 100% difficult is that some brokers prohibit arbitration.
If there is an urgent condition that forces us to close some positions and withdraw funds to protect profits on positions in other accounts, it will certainly be an unpleasant surprise if the broker requires you to close all positions. Therefore, you should make sure your broker allows hedging activities.