Hedging

What is hedging?

Hedging means opening a position specifically designed to offset the risk of an existing trade or portfolio, rather than to generate a fresh profit on its own. If the original position loses money, the hedge is structured to gain (fully or partially), reducing the overall swing in the account’s value.

A simple example is opening a short position on a currency pair while holding a long position on the same or a closely correlated pair, so losses on one side are cushioned by gains on the other.

A worked example

Suppose a trader holds a long EUR/USD position and becomes concerned about an upcoming central-bank announcement that could move the pair sharply in either direction. Instead of closing the trade outright, they open a short position of similar size on EUR/USD (where the broker and regulator permit it) or on a highly correlated pair like GBP/USD.

If the announcement sends EUR/USD lower, the loss on the original long position is largely offset by the gain on the new short — the trader has reduced their exposure to that single event, at the cost of also capping the upside if the pair had instead risen.

Why it matters

Hedging trades certainty of outcome for reduced volatility — it rarely eliminates risk entirely and often comes with its own costs, such as spreads, commissions, or swap charges on both sides of the position. It is generally an advanced technique used by traders and institutions managing larger or more complex exposure, and it is worth noting that some regulators and brokers restrict direct same-instrument hedging on retail accounts, so rules vary by jurisdiction. Hedging sits alongside diversification as one of the broader tools within risk management, though the two work differently: diversification spreads risk across unrelated positions, while hedging directly offsets a specific exposure.

Quick recap

• Hedging opens an offsetting position to reduce risk in an existing trade or portfolio.
• A common form pairs a long position with a short position in the same or a correlated instrument.
• It reduces potential losses but usually also caps potential gains, and carries its own costs.
• Rules on same-instrument hedging vary by broker and regulator — check before relying on it.

Trading forex and CFDs carries a high level of risk and may not be suitable for all investors. Past performance is not indicative of future results.