Hedging is defined as holding two or more positions at the same
time, where the purpose is to offset the losses in the first position
by the gains
received from the other position.
Usual hedging is to open a position for a currency A, then
opening a reverse for this position on the same currency A. This type
of hedging protects the
trader from getting a margin call, as the second position will gain if
the first loses, and vice versa.
However, traders developed more hedging techniques in order to
try to benefit form hedging and make profits instead of just to offset
In this page, we will discuss, some of the hedging techniques.
1. 100% Hedging.
This technique is the safest ever, and the most profitable of
all hedging techniques while keeping minimal risks. This technique uses
the arbitrage of
interest rates (roll over rates) between brokers. In this type of
hedging you will need to use two brokers. One broker which pays or
charges interest at
end of day, and the other should not charge or pay interest. However,
in such cases the trader should try to maximize your profits, or in
other words to
benefit the utmost of this type of hedging.
The main idea about this type of hedging is to open a position
of currency X at a broker which will pay you a high interest for every
night the position
is carried, and to open a reverse of that position for the same
currency X with the broker that does not charge interest for carrying
the trade. This way
you will gain the interest or rollover that is credited to your
However there are many factors that you should take into consideration.
a. The currency to use. The best pair to use is the GBPJPY,
because at the time of writing this article, the interest credited to
your account will be 24
usd for every 1 regular long lot you have. However you should check
with your broker because each broker credits a different amount. The
range can be from
$10 to $26.
b. The interest free broker. This is the hardest part. Before
you open your account with such a broker, you should check the
following: i. Does the broker
allow opening the position for an unlimited time? ii. Does the broker
Some brokers charge $5 flat every night for each lot held,
this is a good thing, although it seems not. Because, when the broker
charges you money for
keeping your position, the your broker will likely let you hold your
c. Equity of your account. Hedging requires lots of money. For
example, if you want to use the GBPJPY, you will need 20,000USD in each
account. This is
very necessary because the max monthly range for GBPJPY in the last few
years was 2000 pips. You do not want one of your accounts to get a
margin call. Do
not forget that when you open your 2 positions at the 2 brokers, you
will pay the spread, which is around 16 pips together. If you are using
1 regular lot,
then this is around 145 usd. So you will enter the trades, losing 145
usd. So you will need the first 6 days just to cover the spread cost.
Thus if you
get a margin call again, you will need to close your other position,
and then transfer money to your other account, and then re-open the
time this happens, you will lose 145 usd!
It is very important not to get a margin call. This can be
maintained by a large equity, or a fast efficient way to transfer money
d. Money management. One of the best ways to manage such an
account is to monthly withdraw profits and balancing your positions.
This can be done by
withdrawing the excess from one account, take out the profits, and
depositing the excess into the losing account to balance them. However,
this can be
costly. You should also check with your broker if he allows withdrawals
while your position is still open. One efficient way of doing this is
brokerage service withdrawals which is provided by third party
by Yannis Karamanakis