Hedging risks is an essential ability for both new and advanced investors. Risk hedging is used when a trading system no longer works, and you've got to secure your capital against the volatile market conditions.
Hedging on Forex
The most simple and popular way to hedge risks in Forex is opening an opposite position. For instance, if you've got a losing long position which you don't want to close, you can just go short, opening a sell position with the same size. Thus, your losing position will get compensated with a winning one.
This is not that perfect, though. When doing so, you've got very little free margin to trad with, which limits your trading and may lead to loss of potential profits. Besides, you will spend money on spread, and this is not less important. You can think of it as 'a little money here and a little there', but this finally may lead to permanent losses.
What is the best way to act then? Sometimes, it is a good idea to just close a bad trade before it ruins your deposit. A mistake, yes, but not a catastrophic one. Such mistakes are good to learn on as long as you get more experienced.
More seasoned traders may choose an index that monitors a few currencies instead of sticking to a single pair. Thus you will be able to see a pair that stands out of the market noise. For example, you can track the dollar index that will help you to monitor both EUR/USD and other currencies. Having a look at the overall market picture is also a way of hedging your risks.
Sometimes, too much hedging and in-depth trading is also bad. In these cases, one had better stick to the simplest strategies without too much analysis or searching magic robots, signals, or signs.
Very often a trader understands why the hedging strategies are good only after they have faced losses. In the worst scenario, this will happen only when the deposit is already blown. This makes using the hedging techniques essential since your first trading day, before you lose too much money.