Forex trading is a highly volatile and unpredictable market, where traders can make or lose money in a matter of seconds. One of the strategies that traders can use to mitigate their risks and maximize their profits is called covering. In simple terms, covering in forex trading refers to opening two opposite positions at the same time, one to buy and one to sell, in order to protect against potential losses and make profits from both positions. In this article, we will explain in-depth how to profit from covering in forex trading.
What is covering in forex trading?
Covering, also known as hedging, is a trading strategy that involves opening two opposite positions in the same currency pair, one to buy and one to sell. The idea behind covering is to protect against potential losses from one position by profiting from the other position. For example, if a trader has a long position on GBP/USD (buying pounds and selling dollars), and the market suddenly turns against them, they can open a short position on the same currency pair (selling pounds and buying dollars) to offset the losses from the long position.
The concept of covering may seem counterintuitive, as it involves opening two opposite positions on the same currency pair, which means that one position will always lose while the other wins. However, the goal of covering is not to make profits from one single position, but to protect against potential losses and make profits from both positions.
How to profit from covering in forex trading?
To profit from covering in forex trading, traders need to follow some basic steps:
1. Choose the right currency pair:
The first step in covering is to choose the right currency pair. Traders need to look for currency pairs that have a high correlation, which means that they tend to move in the same direction. For example, EUR/USD and GBP/USD are highly correlated, as they are both affected by the same economic factors, such as interest rates and inflation. By choosing highly correlated currency pairs, traders can reduce their risks and increase their chances of making profits from both positions.
2. Determine the right timing:
Timing is crucial when it comes to covering in forex trading. Traders need to wait for the right moment to open both positions, as they need to be sure that the market will move in their favor. For example, if a trader has a long position on EUR/USD, and they expect the market to go down, they need to wait for a confirmation signal before opening a short position on the same currency pair.
3. Use the right lot size:
Lot size is another important factor to consider when covering in forex trading. Traders need to use the right lot size for both positions, as they need to ensure that the profits from one position will offset the losses from the other position. For example, if a trader has a long position on EUR/USD with a lot size of 1.0, they need to open a short position on the same currency pair with a lot size of 1.0 to ensure that the profits from the short position will offset the losses from the long position.
4. Set the right stop-loss:
Stop-loss is a risk management tool that traders use to limit their potential losses. When covering in forex trading, traders need to set the right stop-loss for both positions, as they need to ensure that the losses from one position will not wipe out the profits from the other position. For example, if a trader has a long position on EUR/USD with a stop-loss of 50 pips, they need to open a short position on the same currency pair with a stop-loss of 50 pips to ensure that the losses from the short position will not exceed the profits from the long position.
5. Monitor the market:
Monitoring the market is essential when covering in forex trading. Traders need to keep an eye on the market movements and adjust their positions accordingly. For example, if a trader has a long position on EUR/USD and the market suddenly turns against them, they need to close the long position and let the short position run to make profits from the market downturn.
Conclusion:
Covering in forex trading is a powerful tool that traders can use to mitigate their risks and maximize their profits. By opening two opposite positions on the same currency pair, traders can protect against potential losses and make profits from both positions. However, covering requires careful planning, timing, and risk management, as it involves opening two opposite positions that will always result in one losing and the other winning. Traders need to choose the right currency pair, determine the right timing, use the right lot size, set the right stop-loss, and monitor the market to profit from covering in forex trading.
