Risk & Money ManagementOffsettingLocking
Hedging
Holding an offsetting position in order to reduce or neutralise the risk of an existing exposure.
What Hedging means
A hedge is any position taken specifically to counteract the risk in another. A direct hedge opens an equal and opposite position in the same instrument, freezing the combined profit and loss at its current level. A proxy or cross hedge uses a correlated instrument instead, for example offsetting a long EUR/USD position with a long USD/CHF one, which reduces but does not eliminate risk because the correlation is imperfect. Options-based hedges cap downside while preserving upside, at the cost of the premium paid.
Hedging is never free. A direct hedge pays the spread on both legs, may attract margin on both, and usually carries a net negative swap because the financing paid on one side exceeds what is received on the other. Platform behaviour also differs: netting accounts collapse opposing orders into one position, while hedging accounts keep them separate. US retail clients cannot hold direct hedges at all under NFA first-in-first-out rules, and a locked position only postpones the decision it was meant to solve.
Worked example
A trader long one standard lot of EUR/USD who opens a short one standard lot position freezes the floating result in place, but still pays the spread twice and any net negative swap on both legs for every night the pair of positions is held.
Related terms
- Hedging AccountAn account model allowing simultaneous long and short positions in the same instrument as separate tickets.
- Netting AccountAn account model in which all trades in one instrument are combined into a single aggregate position.
- CorrelationA statistical measure between -1 and +1 describing how closely the returns of two instruments move together.
- ExposureThe total market risk an account carries, measured by the aggregate notional value of its open positions.
- SwapThe interest credited or debited for holding a forex position overnight, based on the two currencies' rate differential.
Frequently asked questions
What does Hedging mean in forex trading?
Holding an offsetting position in order to reduce or neutralise the risk of an existing exposure.
How does Hedging work in practice?
Hedging is never free. A direct hedge pays the spread on both legs, may attract margin on both, and usually carries a net negative swap because the financing paid on one side exceeds what is received on the other. Platform behaviour also differs: netting accounts collapse opposing orders into one position, while hedging accounts keep them separate. US retail clients cannot hold direct hedges at all under NFA first-in-first-out rules, and a locked position only postpones the decision it was meant to solve.
What is an example of Hedging?
A trader long one standard lot of EUR/USD who opens a short one standard lot position freezes the floating result in place, but still pays the spread twice and any net negative swap on both legs for every night the pair of positions is held.
Trade with a regulated broker
Understanding the terminology is the cheap part. The expensive part is choosing a counterparty whose execution, financing and withdrawal behaviour match what the marketing implies. Every broker below has been reviewed with a funded live account, and each review states which legal entity and which regulator applies to the account you would actually open.
Check the licence on the regulator's own register before you deposit — our regulators directory explains what each authority enforces, from leverage caps to compensation limits.