Hedging

Hedging is the practice of opening a second position to offset the risk of an existing one. In forex, the simplest hedge is opening a short position in the same pair you're already long — your net exposure becomes zero. You can also hedge with correlated pairs or with options. Hedging reduces risk but also reduces potential profit. If you're 50% hedged, you only capture 50% of any further upside — but you also only suffer 50% of any further downside. It's a risk-management tool, not a profit-maximization tool. Most retail brokers in the US don't allow direct hedging on the same account due to FIFO rules. International brokers usually do. The pros use hedging mostly to protect open positions through high-impact news events without closing the underlying trade.