Hedging often involves opening a second position that is expected to have a negative correlation with the original holding, so that if the price of the original asset moves in the wrong direction, the second position will move in the opposite direction, thereby offsetting the losses. In forex trading, investors can use a second pair as a hedge for an existing position they do not want to close out. Although hedging reduces risk at the expense of profit, it can be a useful strategy in forex trading to protect profits and avoid losses.

Forex hedging is a strategy used by investors to protect against potential losses from currency fluctuations. It involves opening positions in the forex market to offset potential losses in an existing trade or future transaction. The most common methods include forward contracts and options.

In a forward contract, two parties agree to exchange currencies at a future date and at a predetermined rate, locking in prices and reducing exposure to volatility. Options provide the right, but not the obligation, to exchange at a specific rate within a set period, offering flexibility while limiting risk. By using these instruments, traders can stabilize costs and revenues, ensuring more predictable financial outcomes despite market movements.