This time we will learn another form of hedging that is cross hedging. Still have the same meaning as hedging, where there are two opposite open positions aimed at locking down losses. So wherever the price moves, losses are locked in the same nominal. This step is taken when there is a wrong position and a loss, aims to minimize the risk in order not to lose even greater.
Actually this hedging step itself is still a debate among traders, there is a better cut loss position in a manly position if wrong position than lock the losses and in the end we play with ourselves. How not, in one situation there are two opposite positions, buy and sell where a trader must open one position and close another position to minimize the risk or even can generate profit.
WHAT IS CROSS HEDGING
The principle of cross hedging is actually the same as the usual hedging, but the difference is if cross hedging is done in different pairs but still a clump. Suppose buy in pair GBP / USD and sell in pair EUR / USD or buy in AUD / USD pair and sell in pair NZD / USD.
Why should it be in the same family? Because the movement is almost the same because it lies within a zone of currency and is influenced by the same fundamental news news. For more obviousy you can see the comparison through the picture below.
In accordance with the theory we have already pointed out, the movements of the two are almost identical and there is little difference.
If you still do not understand we include the example so you can more easily understand it
Suppose today to analyze the movement of GBP / USD, through technical analysis and fundamental price is expected to move bullish. So it was decided to open the buy position of GBP / USD at 1.2400 with the expectation that the price will move up to 1.2450.
But apparently there is an economic issue that causes the strengthening dollar and the price of GBP / USD fell to 1.2395 and experienced a floating loss of 5 pips.
If in the explanation of the previous hedging technique in the position of 1.2395 it will open a new sell position to lock the losses in the 5 pips, but in cross hedging this is not the way that we will do, but 2 steps below:
Hold GBP / USD buy position in open condition
Open a new sell position in EUR / USD pair at the current level at 1.0790, so when the EUR / USD pair declines traders can still benefit from it.
In a few moments this is what happened
BUY GBP / USD 1.2400 down to 1.2393 with floating loss 7pips
SELL EUR / USD 1.0790 down to position 1.0785 with floating profit 5pips
From these two positions the total profit loss is 7-5 pips = 2 pips. This number will be much better than we experience loss buy GBP / USD at 7 pips is not it? Do you still think that this technique is not effective because it still leaves loss? If you still think so then you have to re-understand what the objectives of risk management.
Where the goal is not turning the losses into profits, but the truth is to minimize the risk that the losses are not too large.
When you already know whether the GBP / USD decline is just a retracement, then all you have to do is release the SELL EUR / USD profit position and let the GBP / USD go up and after just over 2 pips you will benefit from your cross hedging position.
But if you see that the GBP / USD decline is a reversal, then all you have to do is immediately cut loss position of GBP / USD loss and let EUR / USD continue to fall following your sell. After 2 pips pass then you have benefit from your cross hedging position.
But you have to be careful,
Because although cognate and located in one zone, sometimes the movement is not unidirectional and even if unidirectional will not be identical. So all you have to do is stay alert in your trading and keep an eye on the existing price movements.
Actually this hedging step itself is still a debate among traders, there is a better cut loss position in a manly position if wrong position than lock the losses and in the end we play with ourselves. How not, in one situation there are two opposite positions, buy and sell where a trader must open one position and close another position to minimize the risk or even can generate profit.
WHAT IS CROSS HEDGING
The principle of cross hedging is actually the same as the usual hedging, but the difference is if cross hedging is done in different pairs but still a clump. Suppose buy in pair GBP / USD and sell in pair EUR / USD or buy in AUD / USD pair and sell in pair NZD / USD.
Why should it be in the same family? Because the movement is almost the same because it lies within a zone of currency and is influenced by the same fundamental news news. For more obviousy you can see the comparison through the picture below.
In accordance with the theory we have already pointed out, the movements of the two are almost identical and there is little difference.
If you still do not understand we include the example so you can more easily understand it
Suppose today to analyze the movement of GBP / USD, through technical analysis and fundamental price is expected to move bullish. So it was decided to open the buy position of GBP / USD at 1.2400 with the expectation that the price will move up to 1.2450.
But apparently there is an economic issue that causes the strengthening dollar and the price of GBP / USD fell to 1.2395 and experienced a floating loss of 5 pips.
If in the explanation of the previous hedging technique in the position of 1.2395 it will open a new sell position to lock the losses in the 5 pips, but in cross hedging this is not the way that we will do, but 2 steps below:
Hold GBP / USD buy position in open condition
Open a new sell position in EUR / USD pair at the current level at 1.0790, so when the EUR / USD pair declines traders can still benefit from it.
In a few moments this is what happened
BUY GBP / USD 1.2400 down to 1.2393 with floating loss 7pips
SELL EUR / USD 1.0790 down to position 1.0785 with floating profit 5pips
From these two positions the total profit loss is 7-5 pips = 2 pips. This number will be much better than we experience loss buy GBP / USD at 7 pips is not it? Do you still think that this technique is not effective because it still leaves loss? If you still think so then you have to re-understand what the objectives of risk management.
Where the goal is not turning the losses into profits, but the truth is to minimize the risk that the losses are not too large.
When you already know whether the GBP / USD decline is just a retracement, then all you have to do is release the SELL EUR / USD profit position and let the GBP / USD go up and after just over 2 pips you will benefit from your cross hedging position.
But if you see that the GBP / USD decline is a reversal, then all you have to do is immediately cut loss position of GBP / USD loss and let EUR / USD continue to fall following your sell. After 2 pips pass then you have benefit from your cross hedging position.
But you have to be careful,
Because although cognate and located in one zone, sometimes the movement is not unidirectional and even if unidirectional will not be identical. So all you have to do is stay alert in your trading and keep an eye on the existing price movements.
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