Hedging implies protection against the risk of future price fluctuations of assets arranged in advance. This method allows insurance against unwanted exposure to the risks that resulted from trading in the Forex market and other financial transactions.
Hedging is a financial strategy used to protect a trader from losing trades resulting from adverse moves of currency pairs.
1The concept of insurance is the closest to this risk management strategy.
Hedging strategy is used in almost all types of financial businesses but it has a more specific form in the foreign exchange market.
Forex traders often use the so-called correlated currency pairs to hedge against the currency risks.
Correlated pairs move in sync, in the same direction. In addition to positively correlated pairs, there can be used currency pairs with negative correlation, they are also moving symmetrically, but in opposite directions. In this case, a trader opens two long or two short positions. You can learn more about currency pairs’ correlation here.
Hedging involves opening a long position and a short position with the same risk size. Multiple positions can be opened on the same currency pair or two or more trading assets. If a trader selects two currency pairs, they should be positively correlated.
Note on the terminology:
Long position (a long) is a buy position;
Short position (a short) is a sell position.