Hedging forex pairs atr

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Every hedging strategy involves having a position you buy and the position you sell. For every position, you buy or sell, there is another position that does the opposite buy and sells to protect this initial position. The reason Triple Play Hedge is better than other mainstream hedging strategies is that in conventional strategies, you generally need to spend more money and sacrifice some of your potential profits in order to have insurance cover over your investments.

This would hedge your positions as no matter which direction the currency moves, the profits and losses will be offset. Once the direction of the market is certain, and it continues to gain momentum, you can close the loss-making trade and maximize profits from the profitable one. Multiple Currency Hedge — Double Currency Hedge When hedging two currencies, you two take positively forex pairs that correlate and take positions on them in opposite directions.

This strategy protects you against short-term market volatility, and is geared more toward preventing loss than creating large gains. A perfect hedge refers to an investor holding both a short and long position on the same pair at the same time.

These two positions then offset each other, canceling all losses or gains. Usually, a trader will do this because they hold one position as a long-term trade, so they open a contrary position to offset short-term market volatility due to news or events. The opening of a contrary position is regarded as an order to close the first position, so the two positions are netted out.

However, this results in roughly the same situation as the hedged trade would have. Say you open your position just before the price jumps. You could close out your position when the pair reaches a new peak, but you may want to keep it open and see what happens next. In this case, you could open a contrary position in case the pair takes another nosedive—this would allow you to keep your profits from the initial gain.

The hedge would thus safeguard your profits while you wait for more information about how the pair will perform. This can also be a strong strategy when a pair is particularly volatile. What is an Imperfect Hedge? You can buy options to reduce the risk of a potential downside or upside, depending on which way you believe your pair may be going.

Imperfect Upside Risk Hedging If you suspect your pair may increase in price, a call option can help you manage risk. A call option allows you to buy a currency pair at a set price called the strike price before a set date called the expiration date. You are not required to buy the pair, but you are able to at any time before the expiration date.

However, you must pay an upfront premium for a call option. You could then buy a call option for a higher price such as 1. If your pair does not increase after the announcement, you do not have to exercise your call option, and can profit from the downturn in the pair. Your only loss would be the premium paid for the call option after it expires.

However, if your pair does increase after the announcement, then your only risk is the gap between your initial value and the strike price 1. No matter how high it goes, you are able to purchase at this price. Your loss is then 50 pips plus the premium for the call option, which may be significantly less than a major turn in the pair would have cost you.

Imperfect Downside Risk Hedging If you suspect your pair may go down in price, you may want to purchase a put option contract. Put option contracts allow you to sell a pair at a certain price, called the strike price. This must be done before a certain date, called the expiration date. You are not required to sell at the strike price—if you do not sell before the expiration date, you will simply not be able to sell at the strike price anymore. Put option contracts are sold for an upfront premium.