Averting market risks with scalping and hedging
We will cover two popular topics in forex trading, one is called forex scalping and the other is known as hedging. These two methods are used for different purposes and can help you in minimizing the risks that are part of forex markets.
What is Scapling?
Forex scalping is a technique where a trader is involved in several short duration trades along with high leverage to gain from rate variations. The aim is to make small profits from fluctuations in prices and though the gains made are small, as the trader takes part in several trades during a day, the profits together are substantial.
The strategy in scalping is to remember that currency pairs behave differently at different times and utilize those changes. As an example, in case there is movement in USDJPY of forty pips & there is similar forty pips movement in AUDEUR, then trader has to keep in mind that both are separate and strategy for them will be totally different.
It is also important to keep in mind the time during which the trading is taking place. If a strategy has been developed for currency pair of USDEUR for a specific market then this strategy is not useful if applied on some other currency pair being used in a different market. So it is important to modify your plan of action based on the geographical location you are trading in as well as the time of the day you are trading.
The advantage of forex scalping is that large losses are minimized as the trader remains in the market for short durations with less market exposure. In addition to it the other benefit is that the trader needs to know less about the market since he or she stays in the market for very short durations only.
What is Hedging?
Forex hedging is a method that helps in reducing losses which can happen in rates change in future. In hedging different types of contracts such as future and forward contracts are used to reduce chances of losses and minimize exposure to forex rate fluctuations. In forward contracts which are one type of technique used in hedging, the transaction costs are more plus liquidity is also low because it is devoid of any central market.
Similar to forex scalping, in hedging also forex traders need to have proper strategy. What forex brokers and traders do is maintain currency asset portfolio of short as well as long positions. This way they are able to compensate for losses taking in one position with profits made in another. Different derivatives are utilized for this purpose which shows price movements of similar nature as occurring in different spot markets.
A Final Note
To conclude we can say that forex scalping as well as forex hedging are techniques which are very helping for forex brokers as well as forex traders and help them to reduce losses as well as control risks associated with forex rate changes. A trader with good knowledge of these methods can fully utilize his investments and make considerable gains in the market.