Let’s face facts; any investment will create exposure to market and economic volatility, especially around international events such as the Coronavirus and Brexit.
Stock market charts are seen during the opening bell at the New York Stock Exchange (NYSE) on February 28, 2020 at Wall Street in New York City. – Losses on Wall Street deepened following a bruising open, as global markets were poised to conclude their worst week since 2008 with another rout. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)
Interestingly, there are some assets and investment vehicles that positively thrive on such volatility, because they offer traders the unique opportunity to hedge against depreciating markets and profit in the face of adversity.
While represents a tremendous opportunity to experienced investors with a healthy appetite for risk, however, it’s important for others to develop a viable strategy that enables them to effectively hedge risk.
This is especially true in the forex market, which generates more than $5 trillion in daily trading volumes and is incredibly high leverage. So, here are some steps to help you achieve this objective as a currency trader.
1. Choose the Best Currency Pairings
If you’re going to hedge financial market risk, it’s important that you first identify the assets that you’re going to target. This means selecting a viable currency pairing (or more) that will minimise volatility and provide a relative source of security in challenging time.
Any major pairing featuring the U.S. Dollar (USD) offers a viable option, thanks to the underlying strength of the greenback and the existing level of global demand. The USD/GBP and the USD/EUR are particularly good choices at present, with both the pound and the Euro trading in a predictable and ever-depreciating range.
It’s also wise minimising the number of pairings that you trade in the current climate, as this helps to reduce your overall exposure and overall level of risk.
This type of approach, when combined with an appreciation of the fundamental nature of currency and the forex market as a whole, as this will create a foundation of knowledge and determinism that can help you to sustain your strategy and capitalise on the underlying laws that govern change in the market.
2. Diversify Your Investment Portfolio
The challenge posed by exposure is omnipresent in the forex market, particularly as inflated leverage and margin-based trades create a scenario where traders may lose far more than their initial deposit.
One way to minimise exposure is to diversify your investment portfolio, by incorporating relatively secure stores of wealth and so-called ‘safe-haven’ assets such as gold.
Not only does gold provide a tangible asset and secure store for your capital, but it also has the advantage of appreciating in value in times of austerity and socio-economic disruption.
Modern-day traders can also access a diverse range of assets through online brokerage platforms, making it easier to minimise exposure quickly.
3. Make Use of a Demo Account
Another common feature of online brokers is the presence of a demo account feature, which can used for between three and six months on average and enable you to test your hedging strategies in a simulated, real-time marketplace.
Make no mistake; the only difference between a real and a demo account is the fact that you trade with virtual currency in the latter, creating a window of opportunity for you to hone your strategies and refine them as you continue to learn.
Ultimately, this bridges the often cavernous gap between theoretical knowledge and practical understanding, allowing you to reduce your risk in an effective manner regardless of the market conditions.
