Hedging is one way of reducing volatility in a portfolio, and while it doesn’t guarantee against losses materializing in case events don’t progress as expected, in most cases it does help us achieve smoother, more uniform returns from our trades. Here we’ll give a few examples of trades where volatility can be reduced by trading a combination of currency pairs. 

The EURUSD pair is a carry pair, but it is also a barometer of volatility in the currency market. As such, when volatility rises, the EURUSD is expected to move in the same direction with the AUDJPY pair, albeit at a smaller size. In addition the interest rate gap between the Euro and the U.S. dollar is much smaller than that between the Australian dollar and the Japanese Yen. Thus by selling the EURUSD pair while buying the AUDJPY pair we may reduce the overall exposure of our position to forex volatility, at the same time pocketing a sizable interest income as long as we are holding the position.

Nothing much can be achieved in forex if theoretical knowledge is not boosted and matured through constant practice of trading. As it is with mathematics, there is no “observer” in trading. You cannot just read and study and claim to be a trader. You must get into the thick of the action, test your perceptions and beliefs, and hopefully come up with a profit to be taken seriously in the trader community. A  forex trader is forever a student.