Hedging has struggled to acquire traction in forex trading, owing primarily to the laws and policies of numerous brokers that continue to profit from taking positions against their consumers. If you use an ECN broker, you can employ a variety of hedging tactics that can drastically alter the risk / reward ratio in your favor. A well-planned hedging strategy can help you avoid losses or restrict them to a known amount. Triple Hedging involves hedging three currency pairs at once.
What You Need to Know About the Triple Hedge Forex Strategy
Every hedging strategy includes a position to buy and a position to sell. To safeguard the initial position, for every position you buy or sell, another position buys and sells in the opposite direction. Triple Play Hedge is superior to other standard hedging tactics since traditional strategies require you to pay more money and give up some of your potential profits in order to have insurance protection over your investments. It is recommended that traders adhere to big currency pairs for this technique because such currencies are heavily interconnected and thus present numerous options for hedging. There is always the potential that minor pairs, which have less liquidity and volatility, would not perform as planned. Other elements to consider are your capital and the amount of time you have available to identify, execute, and monitor transactions that you put into action.
How Hedging Works
Conventional Currency Hedging
If you are in a “buy” position in the “EURUSD,” you would have to start a “sell” position in the EURUSD. This would hedge your holdings because profits and losses would be countered regardless of which direction the currency moved.
In this case, you would have:
- A EUR buy that is countered by a EUR sell.
- A sell in USD that is offset by a buy in USD.
That is how a conventional hedge works. In normal conditions, it may not result in any gain or loss, though the spread you pay would almost certainly guarantee a loss, but this technique makes sense when you foresee huge market swings and want to capitalize on them without risking the downside. When the market’s direction is clear and it continues to gather momentum, you can close the losing trade and maximize earnings from the profitable one.
Double Currency Hedging
When hedging two currencies, you choose two positively correlated forex pairs and take positions in opposite directions.
As an example, you may open a long position in GBP/USD and a short position in EUR/USD. If the Euro falls against the USD, your long position in GBP/USD will be lost. However, the profit on your EUR/USD position will offset that loss. If the USD falls, your hedge will compensate you for any losses generated by your short position.
You are hedged against dollar risk but have exposed yourself to GBP and Euro. Dealing with several currencies comes with its own set of hazards; there is always the possibility that one position loses more than the other wins, resulting in a net loss, which is frequently caused by slippages.
Triple Currency Hedging
Now consider an example of a multiple currency hedging. We are taking EUR, USD, and JPY currencies with the same lot size.
If you, in this scenario, buy both USD/JPY and EUR/USD, because the USD components cancel each out, you are effectively buying the EUR/JPY. You would have to sell EUR/JPY in order to construct the hedge. This is how the equation will seem now:
- Buy USD/JPY.
- Buy EUR/USD.
- Sell EUR/JPY.
You now have a hedge. You create a hedge here because of the following:
- The EUR has both a buy and a sell option.
- The USD has both a buy and a sell option.
- The JPY has both a buy and a sell option.
That is a practical example of hedging your trades using multiple currencies. Of course, you can experiment and hedge any three of these transactions using the same formula as described above. There is some math involved, so at the beginning, you may want to get a pen and paper and cancel these currencies out as you perform these transactions.
Triple Hedge Pros & Cons
Pros
- The Triple Hedge technique may possibly reduce investment risks.
- It may reduce the stress of excess technical analysis from focusing on a single asset.
Cons
- Minor pairs, which have less liquidity and volatility, may not perform as planned.
- Trading with the Triple Hedge technique may require a level of experience to benefit optimally.
Conclusion
For an opportunity to arbitrage the markets, this type of technique requires time and patience. There are numerous ways that employ hedging as a sort of arbitrage trading to lock in profits over time. If you’re finding trading forex a little too fast, this could be worth a shot as long as everything adds up.
This type of hedging can be employed in the background while you focus on other trading methods that can be used more aggressively throughout the day. It’s all up to you.
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