Forex trading is one of those instruments that are very flexible on what you want to do with it. It can be a wealth accumulator, a protection or a hedge. Hedging is a strategy by investors in which they “bet” on a currency in which they think will do good, while being invested in other things that will go bad.
Let me give you an example, Oil companies consistently hedge their oil. Since they buy a lot of oil as inventory, a lot of oil, not bought in the market will result in losses as time goes by. Because of regulation, unpredictability of the market and such.. So what these company does, is “hedge” oil, which means, they take a “SELL” position on the market, such that, either way the market goes, they never lose money. They may lose money on the physical oil inventory, but they will gain money from the SHORT positions in the market.
Forex Trading as Hedging for Stocks
I will give you a personal example. Lately, I have been investing in stocks. Not just local, but also international. And the War in the middle east has been on the news lately. Its not just news, but they actually affect the economies of countries affected by the war. That includes the US. Since I am invested in the US. What can I do to protect myself from this unpredictability? So I hedge the EURUSD. I know that allowing refugees inside Europe is a bad decision. So I bet SHORT on that currency pair… And, months later, proved to be right. As seen in my position for the pair. So now I’m in a very good position currently at 803 pips in profit.. If the companies I hold in the US are affected by the instability of EUROPE, then I will still make money from my forex trading because its a hedge from my US investments.
Philippine Stocks Hedging Dollars
I also started investing in Philippine stocks. But we all know that the current president is not that business savvy. Before he sat on the presidential seat I already thought of him as a man of the people than a business/economic president. And will do anything to prioritise the people than businesses. Which means, comes a time, it might NOT be good for the stocks I hold. Or it could be that the PSE stocks is just that overhyped. But what ever the reason is, I am afraid of it going down. In which it is currently happening.
Knowing that, I immediately went to my bank and exchanged my PESO to DOLLAR, just before the new President elect take office. That was the hedge. Since I fear that the stocks would drop, the hedge would be — buying dollars hoping that $ would do better than Peso. And months later, I am again proved to be right. I bought dollars at P45.00 and it is now currently trading at P49.92. A 500 pip profit as of this moment.
This is not about telling you people that I am right all the time. This blog has been a journal from the beginning. And this is just my way of explaining to you how you can make use of forex trading as a protection of your money. Remember that rule #1 is to not lose money..
So when you start making money out of your forex trading, you should also think about protecting what you have gained. And that is where hedging comes in.