By entering a second transaction that moves in the opposite direction of the first, traders can protect themselves against potential losses. In a currency hedge, the profits of one currency pair are offset by the losses of the other. This method is useful for traders who do not want to close a position, but who want to reduce their loss while the pair declines.

For example, the EUR/USD and AUD/USD have a correlation of 75 in the table above. It is possible to create a partial hedge by buying Euros and selling Australian dollars. Because the connection is only 75%, only the direction of price changes is taken into account.

GBP/USD and EUR/GBP have a negative correlation. Hedging can either be achieved by buying or selling. It's possible to profit from purchasing GBP/USD if it rises, but long positions in EUR/GBP will lose money if it falls due to the negative connection.

Forex correlation hedging is a strategy that leverages the relationship between currency pairs to minimize risk. In forex, correlation refers to how two currency pairs move about each other. Pairs with a positive correlation move in the same direction, while those with a negative correlation move in opposite directions.

Traders use this strategy by opening positions in correlated pairs to offset potential losses. For instance, buying EUR/USD and selling USD/CHF can serve as a hedge since these pairs often move inversely due to their correlation with the U.S. dollar.

This approach requires a solid understanding of correlation values, which change over time. Proper execution can reduce risk, but over-reliance may limit profit potential if correlations weaken.