Hedging

Hedging is a risk management strategy used by traders and investors to protect their positions from unwanted price movements. In simple terms, it involves opening a second trade that will gain value if the original trade starts to lose. This way, potential losses in one position can be offset by gains in another. Hedging is commonly used in the Forex market, as well as in commodities and other financial instruments.

For example, a trader who is long (buying) EUR/USD may open a short (selling) position on a correlated currency pair like GBP/USD to reduce risk during uncertain market conditions. While hedging does not eliminate risk entirely, it can help reduce the impact of sharp or unexpected market moves. It’s especially useful during major news events or periods of high volatility, allowing traders to stay active in the market while managing exposure.

Browse through other terms in our Trader’s Dictionary.