Hedging
Hedging is opening a position that offsets some or all of the price risk of an existing exposure, so that a loss on one is partly or fully matched by a gain on the other.
The offset can sit in the same instrument or in a different one, where it covers only the part of the move the two prices share. On MetaTrader 5 and cTrader the word also names an account type that keeps opposite positions on one symbol open side by side; on a netting account an opposite order reduces, closes or reverses the single position instead. The broker sets the system on a live account and decides which account types it offers; on cTrader, a live account's type is changed through the broker. When opening a demo account, the trader picks the system on either platform, from the types the broker offers.
This page covers the mechanic; it is not trading advice.
Two meanings: offsetting a risk, and the hedging account
In risk management, a hedge is a transaction that reduces the risk of an investment, in the Nasdaq glossary's wording, and a CFD broker that offsets its exposure to client positions is hedging in that sense. In the CME glossary's futures sense, a hedge is a futures position taken as a temporary substitute for a later cash-market transaction. An offset in a different instrument leaves open the part of one price's move that the other does not follow. Their Correlation measures how consistently the two move together, not how far, and for a 0.80 correlation between the two prices' changes, even the best hedge ratio cuts the standard deviation of the combined result by only 40%, not 80%, because √(1 − 0.80²) = 0.60 of it remains.
The second meaning belongs to trading platforms. MetaTrader 5 help names two position accounting systems, netting and hedging, set by the broker. A netting account applies a sell order to an open long, reducing, closing or reversing it. On a hedging account the same order opens a second position and leaves the first unchanged, as on cTrader's hedging accounts; MetaTrader 4 can also hold opposite positions on one symbol.
Net exposure is identical on both. Long 1 lot and short 1 lot of one symbol add up to zero, since each pip adds to one position exactly what it takes from the other, at any leverage: $10 each way on 1 lot of EUR/USD on a USD account. The account type decides whether two positions exist, and with them the pair's costs and margin.
A fully hedged EUR/USD position, worked
A same-size sell order on a hedging account fixes the price result of a loss-making long at the moment it fills; the spread when the pair is closed and the swap it carries still change the total. The account holds a $10,000 balance at 1:100 leverage; the 1-pip Spread is an assumption, since real spreads are set by the broker, and the account charges no Commission.
Full hedge on the same symbol
Combined result = (Bid − 1.1253) × 100,000 + (1.1213 − Ask) × 100,000- A: long 1 lot EUR/USD bought at 1.1253, at the 1.1213 bid
- (1.1213 − 1.1253) × 100,000 = −$400.00
- B: short 1 lot sold at the 1.1213 bid, at the 1.1214 ask
- (1.1213 − 1.1214) × 100,000 = −$10.00
- Equity on the $10,000 balance
- $10,000 − $410 = $9,590.00
Combined result at any later price
−$410.00
A full hedge can look like a way to pause a loss, because the loss stays floating and neither position shows as closed. The table rules that out: from the moment B fills, no price move changes the combined result while the spread stays at 1 pip. Removing either position restores a full 1-lot exposure, as a new trade at that price would. Had A been closed at the 1.1213 bid, it would have realised −$400.00, so the hedge has fixed that loss plus one extra spread, and on an account that charges commission, one extra round-turn commission.
What the hedge costs while it stays open
Closing the two positions separately pays the spread on each and realises −$410.00. MetaTrader 5 help describes a Close By operation, available only on hedging accounts, that closes two opposite positions against each other and “saves the trader one spread”: −$400.00 on this pair.
Each night both positions carry Swap. On the swap page's basis, the ECB deposit facility rate of 2.50% against the 4.00% upper limit of the US federal funds target range, the long's −1.50% differential and the short's +1.50% cancel, leaving the broker's markup on each. With an assumed, illustrative markup of 0.5% a year per position, the legs run at −2.00% and +1.00%, so the pair pays 1.00% a year on its notional of 100,000 × 1.1213 = $112,130: $112,130 × 1.00% ÷ 360 = $3.11 a night, and $9.34 at Wednesday's triple rollover. The broker's swap table gives the actual figure.
Margin on a hedged pair is a broker setting
MetaTrader 5 calculates forex Margin as lots × contract size ÷ leverage, multiplied by the symbol's margin rate, so at a rate of 1 each position needs 1 × 100,000 ÷ 100 = €1,000. For opposite positions on one symbol, its help leaves the method to the broker. When the symbol's initial margin is 0, a hedged-margin value in the contract specification of 100,000 margins Buy 1 lot and Sell 1 lot EUR/USD as 1 lot, €1,000, and a value of 0 holds no margin on the covered volume. The other method charges the larger of the long and short sides.
On the 1-lot setting this hedge frees no margin. MT5 help converts hedged volume at the weighted average open price, here (1.1253 + 1.1213) ÷ 2 = 1.1233, so €1,000 is $1,123.30 and the Margin level is $9,590.00 ÷ $1,123.30 × 100 = 853.73%. The long alone, converted at the 1.1214 ask that MT5 help uses for a buy, needs $1,121.40, for a margin level of $9,600.00 ÷ $1,121.40 × 100 = 856.07%.
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Common questions
Is a fully hedged position the same as closing it?
In price exposure, yes; in cost, no. Long 1 lot EUR/USD bought at 1.1253 and short 1 lot sold at a 1.1213 bid have zero net exposure, and with an assumed 1-pip spread held constant and no commission, the pair shows −$410.00 at every later price, against −$400.00 for closing the long at 1.1213. Until both close, both positions carry swap unless the account is swap-free. On the rate-differential basis the swap page uses, the differentials cancel and the pair pays the broker's swap markup on each position; the broker's swap table gives the actual figures. The pair also holds the margin the broker's setting requires.
What does an opposite order do on a netting account?
It acts on the single position. Selling 1 lot EUR/USD at a 1.1213 bid against a 1-lot long bought at 1.1253 closes the long at −$400.00; a smaller sell reduces it and a larger one reverses it. The broker sets the system on a live MetaTrader 5 or cTrader account and decides which account types it offers; a live cTrader account's type is changed through the broker. When opening a demo account, the trader picks the system from the types the broker offers.
Does a hedge in a correlated pair remove the risk?
No. A short GBP/USD position against a long EUR/USD position offsets only the part of EUR/USD's move that GBP/USD shares. Correlation measures how consistently the two move together, not how far, and for a 0.80 correlation between the two prices' changes, even the best hedge ratio cuts the standard deviation of the combined result by only 40%, not 80%, because √(1 − 0.80²) = 0.60 of it remains. The second position also pays its own spread and carries its own swap. An equal opposite position in EUR/USD itself brings net price exposure to zero.