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Hypothetical example of hedging a position
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EUR/USD trades at 1.3148/50 |
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Client SELLS 5 Lots of EUR/USD at 1.3148 |
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Client BUYS 5 Lots of EUR/USD at 1.3150 |
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Total Open Positions: 10 lots |
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EUR/USD rises to 1.3200/1.3202
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Takes 50 Pip Profit On Trade |
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Client Closes 5 lots, Exits (BUY) Position at 1.3200 |
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Total Open Positions: 5 Lots |
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EUR/USD falls to 1.3100/02 |
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Take 46 Pips On Trade |
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Client Closes 5 Lots, Exits (SELL) Position 1.3102 |
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How Does Hedging Work?
Account Options
The hedging feature has been enabled for all No Dealing Desk clearing service accounts with the exception of Japanese yen denominated-accounts. If you would like to disable the hedging feature for your live trading account, please send your request in to admin@fxcm.co.uk.
Practice Accounts
You can practise with the hedging feature by registering for our No Dealing Desk demo account. Click Here for Hedging Demo.
Frequently Asked Questions (FAQ)
1. How do I hedge a position on the FX Trading Station?
Hedging a position is as simple as creating an opposing order of the same amount. You can hedge a current position with a Market or Entry order. Placing an order in the opposite direction of your existing position will establish a second ticket.
2. When should I use the hedging feature?
The most effective way to trade a market in which you are not sure if it will continue in the same direction or reverse is to find concrete support and resistance levels.
Trading in such a price environment involves isolating currencies that are trading sideways in ranges (or channels), and then selling at the top and buying at the bottom of the channel. This allows you to pinpoint levels where significant price action will take place.
Currencies that tend to trade sideways are often currencies with low interest rate differentials such as the EUR/CHF and the EUR/GBP.
3. Do I limit my risk by hedging?
Hedged positions do not necessarily limit risk as traders can find themselves losing on both sides of the trade. Hedging a position temporarily locks in the floating profit or loss on an existing position.
While this strategy tends to work temporarily in range markets, it does not work well in trending markets. FXCM advises that you place stop-loss orders on your positions to properly mitigate risk.
4. How do I close a position with the new hedging feature?
A position can still be closed with a stop-loss order, a limit order, or by left-clicking on the close price in the Open Positions window. You can also close a trade by left-clicking on the ticket number that you would like to close, then clicking the close button at the top of the trading station.
5. How do I set up my account to hedge?
The hedging feature is automatically enabled on all No Dealing Desk Accounts opened after February 17, 2007, with the exception of Japanese yen denominated-accounts. Please contact admin@fxcm.co.uk if you want to disable this feature on a live account.
6. If I have No Dealing Desk, will it default to the hedging setting?
For clients on the No Dealing Desk system, the hedging feature is a default option on certain account types and servers. Please contact us at 888-503-6739 for more information.
7. What is the cost to hedge?
The cost to hedge is the additional bid/ask spread.
8. What is the margin requirement for maintaining a hedged position?
The margin requirement on the initial trade will be the standard required margin for trades on your account. For hedged positions, once the second leg of the trade is added, the margin requirement will be divided among the two positions.
While the ability to hedge is an appealing feature, traders should be aware of the various factors that can affect their accounts. Spreads may widen causing margin to diminish leading to the potential danger of a margin call. Pip costs and rollover may also cause a decrease in account equity, adversely effecting hedged positions. For more information about hedging strategies associated with the FXCM No Dealing Desk platform please contact one of our sales representatives.
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