Premier Forex Brokers for Effective Hedging

Forex traders the world over are constantly seeking means of mitigating risk, albeit this is no easy task. Hedging is one of the popular methodologies for achieving this objective, an old practice performed in various financial instruments in trading and investing capacities.

Some people wonder if hedging in forex is illegal or not. Fortunately, this strategy is totally legal in virtually all countries permitting forex trading, except for clients residing in the United States. 

In 2009, the Commodity Futures Trading Commission (CFTC) banned hedging in America primarily due to the perceived financial risks as the American government aimed to protect its citizens after the 2008 global recession. 

Fortunately, a vast majority of brokers operating outside this region are hedging-friendly. The ban only affected the trading environment in the States rather than the rest of the world. This comprehensive list includes all forex brokers allowing hedging without any restrictions.

Naturally, hedging itself is not unsafe when performed smartly. Nonetheless, along with outlining what traders should look for with hedging forex brokers, this article will explain hedging more intricately with common examples of how it’s performed, along with the advantages and disadvantages to note.

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Top 5 Forex Brokers That Allow Hedging

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FXTM

Forextime or FXTM is a globally recognized derivatives broker who began operations in 2011, founded by serial Russian forex entrepreneur Andrew Dashin.

Since this period, they’ve gracefully served millions of clients globally with feature-packed offerings prioritizing technology, global competitiveness, favorable trading conditions, cost-effectiveness, and transparency. 

As luck would have it, FXTM is quite flexible and allows all trading strategies, including hedging. Therefore, it is a no-brainer the broker is on this list.

Read more about FXTM in this review

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IC Markets

One of Australia’s leading and oldest forex brokers, IC (International Capital) Markets is a staple in the forex industry. Since 2007, IC Markets have expanded their trading portfolio from forex to include other CFD instruments, namely commodities, cryptocurrencies, indices, stocks, bonds, and futures.

IC Markets’ mission from the start was to bring a few solutions that were typically reserved for institutional traders. One of these products is the ‘raw’ or zero spread account, a facility affording retail clients even lower spreads than usual. 

Trading fees are one of IC’s unique selling points, which compliments anyone using hedging where low costs are crucial. Everything to do with brilliance is available with IC Markets, making them a worthy addition to this entire selection.

Read more about IC Markets in this review

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FXOpen

Founded in 2003, FXOpen is a retail and institutional ECN forex broker based in the United Kingdom. Furthermore, they have offices and regulatory licenses from Australia, Cyprus, and St. Kitts and Nevis. They have also expanded their instrument portfolio to include indices, equities, commodities, and cryptocurrencies.

As an ECN provider, they promise no requotes on execution because of their access to incredibly deep liquidity. This quality is beneficial for hedging and just the general trading experience.

Overall, FX Open has a simple, stripped-down, no-fuss service for any forex traders to profit from the markets.

Read more about FXOpen in this review

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XM

Since 2009, XM has offered millions of clients in most countries worldwide a massive assortment of tradable instruments, forward-thinking trading conditions, and multi-language customer support. 

The broker is a highly reputable and competitive name in the forex trading community. Some of the perks traders should expect from XM include tight spreads, different accounts, a $30 no deposit bonus for new clients, fee-free deposits, and withdrawals, among other benefits. 

Lastly, XM imposes no restrictions on hedging or other strategies, meaning traders are free to execute how they please.

Read more about XM in this review

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FxPro

As its namesake suggests, FXPro is a forex broker with professional forex services. FXPro is a long-standing and trusted name, having first begun in 2006. Their achievements include more than 80 international awards, six asset classes, seven global sponsorships, and four recognized trading platforms.

For hedging purposes, potential clients will be pleased to know FXPro proudly asserts being a no dealing desk broker, processing orders in less than 14 milliseconds on average, tremendously reducing the chances of negative slippage and re-quotes. 

All these qualities foster a highly efficient environment flexible towards all trading conditions and strategies.

Read more about FxPro in this review

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What is hedging in forex?

The concept of hedging extends across virtually all financial asset classes. As it pertains to forex, hedging is the act of simultaneously buying and selling one or different pairs to offset losses. The net outcome of performing this action effectively means positions ‘cancel each other out.’

Ordinarily, a trader commits a set risked monetary amount in a singular pair without naturally considering methods of reducing it; this is where hedging comes in. Often, hedgers might split this risk in half and allocate it across the initial instrument or two inversely correlated markets and take the opposite position on each.

Let’s consider a few illustrations. The first example is a simple direct hedge and is a common hedging strategy. Let’s imagine a trader was taking a buy position on EUR/CAD. A direct hedge would simply involve opening a buy and sell order concurrently on the same pair.

Should their buy position reach a point where the trader has a stop loss or feels like closing the trade, they would let the sell order run up to a certain point in the hopes of a profit. Alternatively, the trader would close both at the same time. The net result of this action should be zero if they’ve used the same lot size for each pair.

Another example of hedging is taking buy and sell positions on negatively correlated pairs. This action requires a strategic understanding of correlations between currencies. For instance, going back to the EUR/CAD scenario, a trader may open a buy position here and a sell position on CAD/JPY.

Generally, one will stick with instruments having the highest correlation across a specific time frame. This information is accessible from a correlation chart constantly updating the relationship of numerous forex markets.

Other strategies like trading options and futures are more complex and rarely utilized by the average forex trader.

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Why should you consider a forex hedging strategy

Hedging in forex is less complex than in some other instruments because of the evident relationship between pairs. With currencies, the correlation is much easier to observe because traders deal with pairs and the correlations are more consistent. 

For instance, a trader buying USD/JPY is, in some magnitude, betting on the strength of the dollar. They can merely observe the behavior of other pairs where USD is the quote currency, whether that is GBP/USD, EUR/USD, etc., and consider a buy position. 

Of course, nuances exist over the extent of these correlations, but the point is to illustrate selecting markets to hedge isn’t difficult. More importantly, any hedger aims to limit their downside by offsetting losses across different markets.

In some circumstances, depending on market conditions, hedging could yield a trader some profit. However, this outcome would be secondary. Generally, when done correctly, hedging in forex should at least reduce the dollar amount someone may have risked had they not hedged their trades.

If one uses a trading strategy geared more towards the short term, they may consider hedging. Long-term traders can also hedge, but they would typically employ a more advanced method of doing so.

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What is required for a forex hedging broker?

Analysts believe one of the reasons the CFTC banned hedging in 2009 was because of the double costs associated with this practice. Therefore, it stands to reason a trader will desire a broker with the most cost-effective spreads. 

One would also want to avoid brokers charging both a spread and a commission, except if the broker offers an account with fixed spreads. Another aspect to consider is the trading software provided by the broker. 

Platforms like MetaTrader 4 have no restrictions on hedgers. However, if a trader wished to use another platform through their potential broker, they would need to verify if that platform permits hedging. 

Lastly, as with choosing an ordinary broker, regulation, a decent range of tradable markets, accessible payment options, and excellent customer support are all attributes a hedging forex broker should have.

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What are the best conditions for hedging? 

Creating the best conditions for hedging boil down primarily to the utilized strategy, along with implementing responsible position sizing and trade management. A direct hedge strategy carries the lowest downfall presuming one uses the same lot size on each position and manages their running trades responsibly. 

Depending on how the hedger handles the open positions, they should either come out with a predefined loss, no loss, or sometimes even a profit if the other order goes deeper into profit.

For hedging strategies using distinct pairs, facilitating the best conditions is trickier since the trader needs to consider the structure for each market in the hedge. For example, let’s assume a trader decided to hedge a buy EUR/USD trade by buying USD/CHF due to their reliable historical correlation. 

If both markets were in apparent key support and resistance levels, respectively, the EUR/USD might go into a loss along with the USD/CHF trade since both tend to move in opposite directions. 

The ideal scenario might be if the USD/CHF market was away from a resistance area rather than onto it as price is more likely to move down than up.

Correlations will change from time to time. Hence, through experience and practice, the trader needs to consider the market structure of the countertrade to avoid having two running losses unintentionally.

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Pros and cons of forex hedging

Some consider hedging as partial insurance that can protect a trader in the worst-case scenario. While this is the main attraction for many, hedging isn’t without its faults. Some traders might rather decide to reduce their position size as an alternative to hedging. 

Pros

As briefly mentioned a few times, hedging can reduce a trader’s downside through wider exposure if done strategically. In some cases, a few traders can actually profit from being hedgers, which becomes a bonus. 

Cons

Unfortunately, like any strategy, hedging is not a foolproof method and cannot always limit losses. Needless to say, this depends on how a trader performs the hedge in the first place. For instance, if one decided to hedge using inversely correlated markets, the net result might be a ‘double loss’ if each position moved against their favor.

Also, there is the potential issue of ‘double risk.’ Let’s assume a trader ordinarily allocates 2% of their trading account per individual order. Instead of halving this figure in the hedge, they might decide to commit the same 2% for both positions individually.

If the hedge were unsuccessful due to unfavorable market conditions, incorrect position sizing, or irresponsible trade management, their risk would have been doubled. This action could mean the trader needs more capital to maintain the margin of holding bigger positions.

Lastly, although hedging is meant to limit losses, it can conversely reduce the profit potential as well. Using the recently mentioned example, let’s assume a trader split their risk in two, allocating 1% for each position. 

If their risk-to-reward without hedging was 1:5 (2X5 = 10%), the reward would also go down by half through the hedge (1X5 = 5%). Thus, one of the reasons why some traders don’t hedge is this compromise between minimizing losses and minimizing losses.

Through proper implementation of risk-to-reward, some investors would rather maintain a constant loss amount as long as they don’t reduce the profit potential in the long run.

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Conclusion

Hedging is allowed by virtually all brokers, except those operating in America due to the CFTC’s ban in 2009. Clients do not need to open a separate trading account or perform any other action. 

As a business, brokers realize offering flexible trading conditions appeals to everyone. Fortunately, anyone fearing the possibility of ‘double costs’ shouldn’t worry since spreads in forex are pretty low.

What traders should instead focus on is money management and using appropriate position sizing for their accounts. The practice of hedging isn’t necessarily too risky or complex, especially for the average forex trader. 

When performed with strict rules and a sensible strategy, it can achieve the goal of mitigating risk. As with any technique, downsides exist, which we should expect from a market as dynamic as forex.

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What is Hedging?

To reduce losses, risk management strategies are frequently used in the forex market for trading. One of the best hedging forex techniques is the no-loss forex hedging strategy, which gives traders a way to protect their capital. To put it simply, it entails safeguarding a person or entity from prospective losses in another investment.

It limits vulnerability to unfavorable price swings while reducing the likelihood of earnings. Using the strategy against potential losses by taking opposing positions in other currency pairings or related products is called hedging in the Forex market.For the security it offers, a premium is typically needed. A forex bonus hedging strategy can reduce possible losses and improve traders’ trading methods. To employ this strategy, traders would buy a long position and a short position in a currency pair in the same amount at the same time. The two positions will offset each other in terms of profit and loss. This will help limit potential losses in the event of adverse price movements. It can also create an opportunity to take advantage of possible profitable price movements. By taking two opposite positions, this strategy reduces the risk and losses, while increasing a trader’s overall chances of success.

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Is Hedging restricted in the US?

Not all Forex broker hedging allowed in some countries is legal in the US.  This means all brokers residing in the US prohibit using some hedge when trading.

The primary reason for US restriction is that fx hedging strategies cost traders double spread, which obviously favor brokers more than the traders.

The CFTC has placed some restrictions on hedging trade since it favors brokers over traders when it involves one currency pair being opened and another currency pair being closed with the same currency. These restrictions include a limit on the number of allowable positions within a given period of time. The CFTC also requires traders to disclose any potential conflict of interest when trading and to report certain transaction records to the CFTC. Additionally, brokers must take all necessary steps to prevent any type of manipulation or market abuse.

Given the restrictions in the US, it is essential to utilize a hedge forex robot to maintain regulatory compliance to protect their wealth and prevent legal ramifications.

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