Hedging describes the process of buying one asset and selling another in the hope that the losses on one trade will be offset by the gains made on another trade. It works best when the two assets in question are negatively correlated as this will produce the most effective hedge and this means that forex pairs are ideal for hedging. If executed well a hedging strategy can result in profits for both trades. What follows is a hedging strategy designed for the currency markets. Guest post by  FXTM UK or US open The first step to implementing the hedging strategy relies on watching the market during the first hour of either the US or UK open. It is during this time that market activity is at its peak and this period often sets the tone for the rest of the day. Examine the whole forex space and get an idea for which currencies are going up and which are going down versus the US dollar. Then, pick the currency that has fallen or risen the least, this will be your directional trade, and pick another pair that should stay relatively flat, this will be your hedge trade. As an example, let’s say that in the first hour after the UK open the US dollar is showing a lot of strength. EURUSD is down -0.20%, GBPUSD is down -0.45%, CADUSD is down -0.40% and JPYUSD is down -0.65%. As we can see, EURUSD is down the least so we will pick this pair as our directional trade. Because EURUSD is down the least, it is showing the most comparative strength. That means, when the market changes direction EURUSD will go higher more than the other pairs. Now that we have chosen to buy EURUSD as our directional trade we need to pick a currency pair in which to sell EUR against in order to create a hedge. In this case since we can see that JPY is showing the most comparative weakness so a good choice would be EURJPY. Our hedge trade is therefore to buy EURUSD and go short EURJPY. Risk should be kept the same for both trades so that the profit per pip is exactly equal for both pairs. Valid for one session The hedging strategy works because it takes advantage of momentum. In other words, the strength in the euro (EUR) and the weakness in the Japanese yen (JPY) are both exploited and since the open is the most important period for currency pairs, this momentum should persist until the next session. One hour before the next session begins, the momentum is likely to converge as new players join the market so it is at this time that the hedge trade should be closed. As the next session begins you can begin to look out for the next hedge trade. Guest Guest View All Post By Guest Basics & IndustryForex Basics share Read Next Canada gains 21.6K, unemployment rate stable at 6.9% Yohay Elam 8 years Hedging describes the process of buying one asset and selling another in the hope that the losses on one trade will be offset by the gains made on another trade. It works best when the two assets in question are negatively correlated as this will produce the most effective hedge and this means that forex pairs are ideal for hedging. If executed well a hedging strategy can result in profits for both trades. What follows is a hedging strategy designed for the currency markets. Guest post by  FXTM UK or US open The first step to implementing the hedging strategy… Regulated Forex Brokers All Brokers Sponsored Brokers Broker Benefits Min Deposit Score Visit Broker 1 $100T&Cs Apply 0% Commission and No stamp DutyRegulated by US,UK & International StockCopy Successfull Traders 9.8 Visit Site FreeBets Reviews$100Your capital is at risk. 2 T&Cs Apply 9.8 Visit Site FreeBets Reviews$100Your capital is at risk. 3 Recommended Broker $100T&Cs Apply No deposit or withdrawal feesTrade major forex pairs such as EUR/USD with leverage up to 30:1 and tight spreads of 0.9 pips Low $100 minimum deposit to open a trading account 9 Visit Site FreeBets ReviewsYour capital is at risk. 4 T&Cs Apply Visit Site FreeBets ReviewsYour capital is at risk. 5 Recommended Broker $0T&Cs Apply Trade gold, silver, and platinum directly against major currenciesUp to 1:500 leverage for forex trading24/5 customer service by phone and email 9 Visit Site FreeBets ReviewsYour capital is at risk.