The disadvantages of hedging
Since forex traders cannot avoid losing anytime, they resort to techniques which may help them shield their investment to stay firm in the business. This is especially so with seasoned traders where most employ hedging technique where they involve themselves to be positioned in two different currency pairs at one time in their trade.
Although, this technique is learned, it is not advisable to be employed by starters who do not yet have enough knowledge in the world of forex trading. Hedging is complicated for starters to understand and in the process they might end up losing money more than earning. This technique is only applicable to those who have the trading experience and the skill. However, it gives an edge to newbies who are interested to learn the techniques even if they will not use it for the moment. Learning it may let them understand the trading business more.
Hedging is not at all free. It comes with a fee. Once you decide to employ it to protect your money from risks, you have to be financially prepared to pay for the cost. This is whether the trading environment is considered risk free. Hedging is supposed to protect your investment from risks when negative situation occurs. But in times where there is no potential risk, its cost has to be paid. Sometimes your profit can all go to the cost of hedging. With this, it is important to consider if its usage is really worth your money. You have to remember too that hedging will not help you earn big. It is the risk that you are taking that may kick huge profit but not hedging itself. However, if you reduce your risk, you are also minimizing your potential to earn big profit.
Another disadvantage of hedging is that it does not offer traders the flexibility essential to quickly take actions when extremely needed. Hedgers are stuck in their position they had chosen so that hedger do not hedge all the time in their trading career. They only hedge when it is extremely a need. Hedging is not also perfect in itself. It also has its own risk as anything could happen along the process of trading and it would not protect your money as expected.
If after all, you decided to hedge, consider its cost against the profit that you are going to earn. Calculating the potential profit and the cost plus your gain may give you an idea if you are going to win or not.