Hedging in forex means opening a position that offsets the currency risk of an exposure already held, so that a move against the original position is partly or wholly compensated by the hedge. It limits the effect of price movement in both directions and it carries a cost; it does not remove risk.
Three ways an exposure is hedged
Offsetting position in the same pair. A long EUR/USD is matched by a short EUR/USD of comparable size. Whether both legs can sit open at the same time depends on the account: hedging accounts hold them separately, netting accounts merge them into one reduced position. Movement in the pair stops affecting the combined result — in both directions.
Correlation hedge. The offsetting position is taken in a different but statistically related instrument, for example a long EUR/USD against a short GBP/USD. The relationship is measured on past data and is not fixed; when correlation weakens, both legs can lose at once. The hedge is partial by construction.
Option. A premium is paid for the right to transact at a set rate. The premium is a known cost paid up front and is lost in full if the option is not used.
All three are descriptions of mechanics, not recommendations. Margin is required on the exposure being hedged, and retail leverage limits apply throughout: 30:1 on major currency pairs, 20:1 on non-major pairs, major indices and gold, 10:1 on other commodities and non-major indices, 5:1 on individual equities, 2:1 on cryptocurrencies.
Why a hedge costs more than closing the position
Closing pays the spread once and ends the exposure. Hedging keeps the first position open and adds a second, so the client pays the spread on the second leg as well and then carries both legs overnight.
Mechanics of the carry. A long and a short in the same pair accrue swaps in opposite directions, but the two rates are not mirror images: the pair of them normally nets to a debit rather than zero. On a hedged 1-lot EUR/USD pair of positions where the long is debited 0.90 units of account currency per night and the short is credited 0.30, the net cost is 0.60 per night, or roughly 18 over thirty days, and it accrues whether the market moves or not. The arithmetic is set out under FX swap.
What hedging does not do
It does not make an exposure risk-free. Locking a position removes directional movement but keeps the running costs, keeps margin tied up, and leaves the decision of when to unwind — a decision taken at whatever prices exist at that moment. A correlation hedge can widen the loss instead of narrowing it. An unused option premium is a certain cost against an uncertain event.
Hedging is a way of transferring risk into a known cost, not of eliminating it. Sizing the exposure in the first place remains the primary control: see the position size calculator.
