Hedging is a method used to minimize the possible risks in our trade. It can be compared to the insurance policy that protects our business from particular types of risks. Investors open the offsetting position to protect themselves against fluctuation in the near future. Investors and traders in Singapore hedge when they are unsure. One needs only pay the fee to the broker. Hedging can be utilized in two ways. They are discussed below.
Opening the position of the off-setting instrument
With the initial security, the offsetting instrument is related, and it allows investors to offset the potential risks related to the profit goal. For instance, an airline company may go along with crude oil. These two sectors are much related to the rise of crude oil prices. A rise in crude oil can accelerate the long-term suffering in the of the airline. If the oil price becomes steady, it can help to offset the loss. When the pricing value of oil go down, the oil loss can give us losses. In this case, hedging may help to a great extent to eliminate most of our risks in the trading.
By buying and then selling the derivatives, beginners may reduce the portfolio risk and may reward the exposure opposing the liquidity of the current positions. This type of strategy becomes so handy if we do not want to trade directly with the portfolio because of the uncertainties and risks related to the market. In this type of hedging, the hedge is calculated precisely and simply.
When a currency reaches a certain low price level, a stop-loss order can be set. This type of technology generally use with a long time trade and may become so profitable in a short time position too. It becomes very useful when investors do not have time to check the position. No one can say for sure, that they will earn money from a certain trade. So, it is always better to use protective stops. View this page of Saxo and learn the proper way to place the stops using a robust platform.
In options market, stop-loss plays a vital role as none may predict the next trend of this market place accurately. Every trade is dealt with the risk, and the future price is totally unknown. When the trade goes against our expectation, stop-loss does not only help to reduce the loss but ir also protects any profit by closing the trade automatically.
For instance, if the current EUR/USD is 66.25 in rate and if we do not find the announcement of the European chairperson that it will go up or down, we may expect a lot of volatility in the market, and the Euro will rise. Therefore, if we buy the currency pair of EUR/USD and get a sudden announcement regarding the fall of the USD, we can put our stop-loss order at 66.05 so that it cannot go to 65.05 or incur more loss.
Take profit order
A take profit order works in conjunction with a stop-loss order for the management of open positions. If security passes the take-profit point, T/P is executed, and the trade is closed. The difference between these two points helps to define the risk to reward ratio of the trade.
The benefit investors get by using the take profit point is to be relieved from the execution of the trade automatically. Take profit orders are executed to get the best price based on the behavior of the currencies. This order works well for the short-term investors as they are very interested in managing their risk in the shortest possible time.
At the bottom line, this can be said that one should be careful with the management of risk. Without tackling the loss, it can be really devastating to execute trades. Experts use these methods to ensure the highest profit and the minimum amount of risk.