Managing Risks and Currency Hedging

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I realized that you can really minimize the risk in trading. To do that, you want to open your position on currency pairs that are correlated. If I want to open a position on EURUSD, you may realize after a while that you might be wrong, an attitude that is always good to have.

Having said that, you may want to look at the correlation table below.

As of September 2011

If you want to manage risk for the EURUSD trade. You may want to open a position on AUDUSD and other correlated pairs.

Hedging and Managing Risk

Lets say you go SHORT EURUSD, to hedge that risk you need to go:

  • LONG AUDUSD
  • LONG EURGBP
  • LONG GBPUSD
  • SHORT USDCAD
  • SHORT USDJPY
  • SHORT GOLD

if LONG EURUSD

  • SHORT AUDUSD
  • SHORT EURGBP
  • SHORT GBPUSD
  • LONG USDCAD
  • LONG USDJPY
  • LONG GOLD

Doing this strategy may give you lesser risk because once EURUSD may go downtrend other currency may go uptrend thus minimizing the risk. But it also minimizes the reward. If you want to be a daredevil and amped up your profits, you may use the one below.

Doubling the Risk & Reward

Your position SHORT EURUSD, to double the risk you need to go:

  • SHORT AUDUSD
  • SHORT EURGBP
  • SHORT GBPUSD
  • LONG USDCAD
  • LONG USDJPY
  • LONG GOLD

if LONG EURUSD

  • LONG AUDUSD
  • LONG EURGBP
  • LONG GBPUSD
  • SHORT USDCAD
  • SHORT USDJPY
  • SHORT GOLD

Knowing what currency relates to one another gives you the advantage to play your cards well in case you are not sure.