There are numerous statistics that define the size of the forex market, but it’s fair to say that some are more telling than others. For example, the global forex trading market is worth a staggering $1.934 trillion, and to put this into context this number of two-and-a-half times larger than the current global GDP.
The question that remains, of course, is what contributes towards the enduring popularity of the forex market? In truth there are many factors, including the liquid nature of the marketplace and the potential to profit even as the value of a particular asset depreciates.
These facts contribute to relatively low-risk trading strategies, which can help to strike the ideal balance between profit and loss in the forex market. But what precise strategies are best placed to help you minimise risk?
The Concepts of Hedging and Market Neutrality
You’ve probably heard of the term ‘hedging’ as a forex trader, and the truth is that this is central to any low-risk trading strategy.
In fact, hedging is specifically designed to mitigate market risk, as traders are compelled to assume a market position that actively reduces their exposure to price movements.
This leads nicely onto the notion of market neutrality, which enables forex operators to combine long and short trades that targets and obvious price asymmetry. The goal here is to directly stave off any exposure to market risk with a number of simultaneous and correlated investments, on the assumption that all asset prices will eventually revert to their mean.
Based on the principle of determinism (which is central to forex trading), this strategy is a form of statistical arbitrage that’s based on market neutrality and understands the underlying laws that govern change in the foreign exchange.
It also ensures that price fluctuations in the volatile forex market will have little impact on your overall profit and loss, whilst this type of long-term trading strategy will help to deliver consistent gains over time.
When looking to hedge as a forex trader and create a market neutral position, diversification should also be a key watchword. This can create groups of assets across a number of markets, and this automatically reduces volatility and level of liquidity that can be enjoyed by investors.
How to Developing your Low-risk Hedging Strategy
There’s no such thing as a fool proof trading strategy, of course, and there’s no doubt that the dynamic nature of the foreign exchange makes it hard to maintain a market neutral position in real-time.
To mitigate this risk, however, you should consider using the type of demo trading accounts offered by platforms such as Oanda.
After all, this enables you to experiment and diversify your portfolio in a simulated, real-time marketplace, without requiring you to invest your hard-earned cash.
Not only does this protect your capital, but it also enables you to achieve genuine market neutrality and imagine a diverse portfolio that enables you to hedge against market exposure.
In general terms, this also bridges the often seismic gap between theory and practice in the forex market, and in this respect it brings concepts such as hedging to life. Without this, it’s almost impossible hedge against volatility or similar market risks, or identify the tools that can help you to minimise your exposure.
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