You might have heard about “market neutral” strategies, which are often run by hedge funds, typically in equities, but do you know what a market neutral strategy is?
Basically, it is a trading / investment strategy which seeks to avoid some form of risk entirely, by means of hedging. For example, a market-neutral equity strategy might try to completely avoid having its performance affected by the broad market movement. It could do this by being sure it is long just as many shares as it is short, in terms of market capitalization. More commonly, such market-neutral equity strategies try to be neutral on specific market sectors or industry.
An unusual question comes to mind: can the same “market neutral” concept be applied in Forex? It certainly can, although there might only be very limited reasons to try to apply it. For example, if you take the view, as I do, that the Forex market is predominantly driven by the U.S. Dollar, you might want to apply a “market neutral” strategy concerning other currencies. You could do this by only trading the U.S. Dollar Index, if your broker offers it, or by only trading a “basket” of USD currency pairs weighted by trade volume, or some other measurement, between the countries.
One factor traders often miss is that the base currency of a trading account is effectively a trade itself. Of course, most people will want to have their account based in the currency in use where they live, for ease of processing withdrawals and deposits, but it is possible to hedge out fluctuations in your base currency if it has been particularly volatile by simply opened an unleveraged trade against your base currency and in favor of some other currency you are happy to be theoretically denominated in.