Mar 10 2010
The fascinating thing about the Forex market is the ability of traders to be involved in events all over the world on different scales and basically hedge theirs life.
For example I visited Europe with a buddy of mine in February 2010. We booked the trip early December 2009. I figured the whole trip would cost us USD 20,000 at the exchange rate of 1.5094 as of December 2, 2009. Payment was due February 15, 2010.
Our expenses would fall if the Euro fell against the US Dollar, but would increase if the Euro would increase. I pulled up the chart of my
Forex trading system and saw that the dollar was at 1.5094 when we booked the trip.
Actually I wanted the Euro to decline for our trip so our cost would also fall. Never the less, just because I wanted the Euro to decline didn't mean that it would. If the Euro increased, our journey could get considerably more costly. The current situation of the Euro was very uncertain. It could move up or move down. But probability for the Euro of moving down was much higher because of the situation of the terribly weak economy and the overdone spending in Greece, which belongs to the Euro.
Since a regular contract represents USD 100,000 in US currency, it was too big for us to use as a hedge. The minis on the contrary each represent USD 10,000 in US currency, so this is where we set up a position.
Looking at our chart, we place a sell stop order for 2 mini contracts EUR/USD at 1.5093, one pip below the current price. This sell stop order means that I would get into the market only when it trades down and through 1.5093. I would be getting stopped into a short position.
I decided to do this at the lower price, instead of the immediate level, if the Euro did roll over and rise. If it climbed from when we booked our fair, it would be a minus for us, as our journey will get more expensive with each rise. Never the less, if the Euro fell, it could start a massive run and ease our expenses.
One mini represents USD 10,000, so we were essentially hedging USD 20.000 worth of US currency, with the two minis.
On February 15, 2010, almost 2 months later we got out of the trade. The Euro had a big fall to 1.3645, for us a gain of 1449 pips (1.5093 - 1.3644 = 0.1449). Two minis equal a gain of USD 2898. They made us ver happy. Instead of paying USD 20,000 as we had figured out, we only paid USD 17,102.
There are many other opportunities people can hedge their lives in the Forex markets. If someone wants to hedge his US dollar 100,000 savings against a weakening dollar, he can buy one contract of EUR/USD, and have an excellent hedge. Or he can actively take part using
Forex trading robot.
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