HOW TO HEDGE YOUR OWN LIFE IN FX TRADING

There are many trade setups for fx trading that work on smaller time frames,but this article will not focus on them. However, the fascinating thing about the fx trading market is a trader's ability to participate in world events on different scales and essentially "hedge their life." in fx trading

For example, my wife and I visited Spain, France and Italy from December 18, 2003 through January 14, 2004. (Yes, it's colder then but there aren't any lines). Excluding airfare, I added up estimated costs in Euros. On the day we booked this trip on September 30, 2003, the exchange rate was 1.1675. Based on this rate, I estimated that the trip would cost US $15,000. This cost would fall if the Euro fell, but would increase if the price of the Euro also increased. I pulled up a chart on fx trading.

On this chart, point#2 shows where the market was trading on the day we booked the trip. Point #1 shows the all time highs at 1.1932 that were hit on May 27, 2003. For our trip, I wanted the Euro to fall so our costs would also fall. However, just because I wanted the Euro to fall didn't mean that it would. If the Euro took off, our trip could get considerably more expensive. Since a regular contract represents $100,000 worth of US currency, it was much too large to use as a hedge in fx trading. The fx trading minis each represent $10,000 worth of US currency, so this is where I looked to set up a fx trading position.

Looking at the chart on this day, I decided to place a BUY STOP fx trading order for 2 mini EURUSD contracts at 1.1933, one pip above the all time highs. This fx trading buy stop order means that I will get into the fx trading only when it trades up and through 1.1933. Instead of getting stopped out of a short position, I would be getting stopped into a long position since I was currently flat fx trading.

I decided to do this at this higher level, instead of at the immediate price, in case the Euro did roll over and fall while I was fx trading. If it fell from when we booked our tickets, it would be a plus for us, as our trip would get cheaper with each decline. However, if the Euro broke out to new highs, it could ignite a huge rally and really inflate our trip budget. 1 fx trading mini contract represents $10,000, so I was essentially hedging $20,000 in US currency with the 2 mini fx trading contracts. Since I underestimated how much the trip would cost, this fx trading actually worked out perfect in the end.

On November 18, almost 2 months later, my fx trading buy stop was hit at point #3. By the time we left for our trip at point #4, the Euro had moved over 500 pips from my entry. By the time we got home at point #5, I closed out the position at 1.2665, a gain of 732 fx trading pips. With 2 fx trading mini contracts that equated to a gain of $1,464.00, which paid for the increased exchange rate we had to pay while we were over there. Had the Euro hit my buy stop and then sold off to 1.10, I would have lost money on the trade but this would have been offset by the money saved during the trip due to the more favorable exchange rate. Had I set this up as "normal" fx trading using 5 regular sized contracts, a 732 pip move would have equated to $36,600.

There are many other ways a person can "hedge their life" in fx trading. For people who think the value of the US Dollar is going to continue to decline, and they are worried about the value of their savings deteriorating against other world currencies, they can hedge their savings account by going long the EURUSD fx trading. If a person has $240,000 in savings, they can buy 2 regular contracts and 4 mini contracts, and have a perfect hedge fx trading.