Used correctly, hedging is one of the most conservative strategies when trading with CFDs. It is used exclusively to hedge risks in the portfolio. Hedging with CFDs is also suitable for classical investors. The risks of a long-term portfolio can be minimized flexibly if necessary. In the following, we would like to present a strategy for hedging with CFDs based on various practical examples.

Why hedging with CFDs makes sense

Investors should think about a hedging strategy especially in turbulent times on the stock market. Contracts for Difference (CFDs) can be used to cover all risks of a portfolio, so that they are neutrally positioned (full hedge) or only "cover" a part, leaving only a residual risk. Among other things, short positions on a complete stock or fund portfolio or individual securities are very popular.
Short positions allow traders to speculate on falling prices. They are always used in hedging when the investor expects corrections in the markets over a short to medium-term period. The same also applies if these have already begun, but the long-term positions in the portfolio should not be sold. This form of hedging is also known as a "short hedge". Another variant of hedging is exchange rate hedging.
A possible alternative to hedging is to create a stop loss order for the positions in question. However, this has a decisive disadvantage: when the stop is reached, positions that have been built up with great effort would be liquidated. In addition, there is a high financial burden due to order fees.

Hedging with CFDs requires low capital investment

But how exactly does hedging with CFDs work? This can be explained very well with an example from currency hedging. A currency risk exists, among other things, with foreign or commodity investments, provided that these are quoted in US dollars. To eliminate this risk with a hedge strategy, a long position is opened with exness fx broker on the EUR/USD currency pair. This speculates on a weakening dollar.
If, on the other hand, the portfolio contains mainly euro-denominated underlyings and a weakening euro is expected as a result of the European debt crisis, a short position is taken in EUR/USD.

Practical example of a currency hedge

Let's assume an investor has US stocks with a volume of 50,000 US dollars in his portfolio. These should now be protected against exchange rate risks, i.e. a devaluation of the greenback against the euro, as shown in the chart below.

For hedging, a long position is taken on the same volume in the EUR/USD. The current rate is 1.10150/1.10158 US dollars, so the position corresponds to 4.6 mini contracts. A margin of 0.5 percent applies to the trade, which is equivalent to $250. After placing the trade, currency losses in the deposit are compensated by the simultaneous profit of the CFDs.

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