Forex brokers allowing hedging are plentiful, as almost all non-US regulated brokers allow this risk management strategy. Since there are many choices for traders to consider, we have extensively researched the field for you, the results of which we set out in the list of the best Forex hedging brokers below.
Hedging Brokers At A Glance
- FXTM, Best all-around broker with high floating leverage and fast execution.
- FP Markets, ECN trading with leverage up to 1:500.
- Eightcap, Competitive pricing + excellent daily videos.
- BlackBull Markets, Best ECN trading environment, with scalping and hedging.
- AvaTrade, Highly regulated, choice of fixed or floating spreads.
Comparison of the Best Hedging Forex Brokers
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Regulators | CMA, CySEC, FCA, FSC Mauritius, FSCA | ASIC, CySEC, FSCA | ASIC, CySEC, FCA, SCB | FMA, FSA | ASIC, BVI, Central Bank of Ireland, FFAJ, FSCA, KNF, MiFID |
Year Established | 2011 | 2005 | 2009 | 2014 | 2006 |
Execution Type(s) | ECN/STP, Market Maker | ECN/STP | ECN/STP, Market Maker | ECN/STP, No Dealing Desk | Market Maker |
Minimum Deposit | |||||
Average Trading Cost EUR/USD | 0.1 pips | 1.1 pips | 1.0 pips | 1.3 pips | 0.9 pips |
Average Trading Cost GBP/USD | 0.2 pips | 1.4 pips | 1.2 pips | 2.0 pips | 1.5 pips |
Average Trading Cost Gold | $0.18 | $0.21 | $0.12 | $0.90 | $0.29 |
Trading Platform(s) | MetaTrader 4, MetaTrader 5, Proprietary platform | MetaTrader 4, MetaTrader 5, cTrader, Proprietary platform, Web-based | MetaTrader 4, MetaTrader 5, Trading View | MetaTrader 4, MetaTrader 5, Trading View | Other, MetaTrader 4, MetaTrader 5, Web-based+ |
Islamic Account | |||||
Negative Balance Protection | |||||
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FXTM
In Summary Best all-around broker with high floating leverage and fast executionFXTM, or ForexTime, is one of the world's greatest all-around brokers. This trustworthy broker, who has a decade of expertise, is currently open to traders in Cyprus, the United Kingdom, and Mauritius. FXTM allows you to trade a variety of currencies, as well as gold, silver, and other precious metals. Traders who purchase stocks through ForexTime assume full legal ownership of the shares. Whether you're looking to invest in commodities, CDFs, stocks, metals, indices, or oil, FXTM is the right broker for you.
Pros & Cons
- Excellent commission-based Forex pricing environment and transparency
- Upgraded MT4/MT5 trading platforms plus proprietary mobile trading app
- Quality market research and educational content for beginner traders
- A highly regulated broker with a tier-1 license
- No cryptocurrencies and limited choice of commodities
FP Markets
In Summary ECN trading with leverage up to 1:500FP Markets, an Australian forex broker, was launched in 2005, more than 15 years ago. Over 60 currencies, 10 crypto choices, over 20 commodities, several CFDs, and a variety of other assets such as precious metals and oil are among the trading possibilities offered by the financial services provider. FP Markets is available in more than 80 countries around the world and is regulated and authorized by CySEC and ASIC. This multi-award-winning forex broker offers Euro, US Dollar, British Pound, and Australian Dollar as currency alternatives. They also provide training resources for new traders in order to improve their chances of making a profit from their new business.
Pros & Cons
- Choice of trading platforms and auxiliary trading tools
- Very competitive cost structure and excellent asset selection
- Low minimum deposit requirement and leverage of up to 1:500
- Well-regulated and trustworthy
- Availability of Iress geographically restricted
Eightcap
In Summary Competitive pricing + excellent daily videosHedging is a Forex trading strategy often used but equally misunderstood and poorly implemented. Eightcap allows hedging except for its clients at its ASIC-regulated subsidiary. Profitable hedging requires deep liquidity and superb order execution to capture price action in volatile trading conditions, which Eightcap provides and excels at with its innovative trading infrastructure.
Low trading fees and high leverage are equally important, which Eightcap offers. Since algorithmic trading solutions execute most hedging strategies, the best hedging Forex brokers invest in technology to ensure low-latency execution. VPS hosting, available at Eightcap for free for qualifying traders, is another vital tool.
Pros & Cons
- Low minimum deposit and high leverage of up to 1:500
- Competitive cost structure
- Excellent technology infrastructure and seasoned management team
- Daily research and quality educational content
- Limited leverage in some areas
BlackBull Markets
In Summary Best ECN trading environment, with scalping and hedgingBlackBull Markets was founded in 2014 in New Zealand. Like many antipodean Forex brokers, BlackBull Markets is an ECN broker, offering raw spreads and commissions. They are regulated in New Zealand by the Financial Services Providers Register (FSPR) and offer a maximum leverage on some Forex currency pairs as high as 500 to 1. In addition to their global headquarters in New Zealand, BlackBull Markets also has presences in the form of branch offices in New York and Malaysia. BlackBull Markets offers a relatively tight range of tradable assets: 27 Forex currency pairs and crosses, gold, silver, crude oil, natural gas, and 6 major equity indices. That should be sufficient for those traders with more focused strategies not requiring wide diversification.
Pros & Cons
- ECN/NDD execution model with deep liquidity
- Institution-grade pricing for retail traders via proprietary price aggregation
- ZuluTrade and Myfxbook for social trading
- Leverage of up to 1:500
- Limited deposit options
AvaTrade
In Summary Highly regulated, choice of fixed or floating spreadsIf you are new to the trading game and looking for a forex trading app to assist you, AvaTrade may just be the answer. This highly regulated broker goes the extra mile to assist new traders and traders looking for hedging trading, in making a success out of their new journey. AvaTrade provides users with extensive training resources. These trading training resources consist of over 200 informative videos and 40 different courses that are available to all users via SharpTrader. These consist of valuable lessons that will guide new traders in making the right decisions. AvaTrade is licensed and regulated in Japan, Israel, the United Arab Emirates, South Africa, Australia, the British Virgin Islands, and Ireland where their headquarters are based.
Pros & Cons
- High-quality educational offering via SharpTrader
- Excellent choice of trading platforms catering to various trading needs
- Broad asset selection and cross-asset diversification opportunities
- Well-regulated and trusted broker with oversight from a central bank
- Trading costs competitive but nothing special
Hedging can be a useful part of a trading strategy if it is executed properly. It can also be a risk management technique in the hands of skilled traders. When the online brokerage industry launched, some brokers restricted hedging, and traders with US regulated brokers cannot hedge. The initial launch version of the MT5 trading platform, which is widely considered to be a failed successor to MT4, only allowed netting and had hedging features disabled. MetaQuotes, which developed the MT4 and MT5 trading platforms, listened to the negative feedback and realized its error, correcting it with an update that now supports both modes for the benefit of non-US traders. Today, most brokers allow hedging, but most retail traders do not fully understand hedging.
Dumb vs Smart Hedging
The most definitive difference within hedging is between a “dumb hedge”, which professional traders do not use, and a “smart hedge”. A dumb hedge means taking a buy and a sell position of equal size simultaneously in the same asset. This locks in any floating profit or loss, but commits to a day-to-day capital bleed, as swap rates on leveraged overnight positions will have to be paid on both positions. A dumb hedge serves no beneficial purpose, and traders benefit more by closing a trade rather than taking an opposing one of equal size in the same asset for the same net result. A “smart hedge”, where the trader takes a second position in a correlated asset, can however be an intelligent risk management strategy but will also increase overall risk. Therefore, it is best suited as a strategy for skilled traders who understand financial markets. An example of a smart hedge in Forex might be buying EUR/USD and selling GBP/USD due to the strong correlation between the two currency pairs. Stock traders might hedge by buying individual equities while selling the index of which they are a component. Options contracts are also heavily used in hedging portfolios.
Restrictions on Hedging
Traders should avoid brokers that place restrictions on hedging regardless of whether they want to use hedging or not. The best Forex brokers do not impose needless restrictions upon their clients. The hedging Forex brokers we reviewed above in detail ensure their traders have the tools to build an edge in the market. Before deciding on hedging as a strategy, traders should learn how to create smart hedges and forget about dumb hedges.
Types of Hedging Trading Strategies and Styles
The most definitive difference within hedging is between a “dumb hedge”, also known as a “simple hedge”, which professional traders do not use, and a “smart hedge”, also known as a “complex hedge”.
A simple hedge strategy means taking a buy and a sell position of equal size simultaneously in the same asset. This locks in any floating profit or loss, but commits to a day-to-day capital bleed, as swap rates on leveraged overnight positions will have to be paid on both positions. A dumb hedge serves no purpose, and traders benefit more by closing a trade rather than taking an opposing one of equal size in the same asset for the same net result.
A complex hedge strategy, where the trader takes a second position in a correlated asset, can however be an intelligent risk management strategy but will also increase overall risk. Therefore, it is best suited as a strategy for skilled traders who understand financial markets. An example of a smart hedge in Forex might be buying EUR/USD and selling GBP/USD due to the strong correlation between the two currency pairs if the British Pound is seen as more prone to weakness than the EUR/USD. Stock traders might hedge by buying individual equities while selling the index of which they are a component. Options contracts are also heavily used in hedging portfolios.
Complex hedge strategies can be divided into the following strategies or styles:
- In Forex, whether you are long and short of the same currency in two different pairs, or long and short of distinct but correlated currencies.
- Using an index or basket to hedge against a long or short trade in an individual asset.
- A cross-asset class hedge in correlated assets, for example being long of WTI Crude Oil while being short of the Canadian Dollar. Another well-known investment hedge is to hold part of your portfolio in bonds as well as stocks, typically giving some upside in bear markets.
- A long/short strategy within the same asset class, for example being long of 10 stocks you are most bullish on and short of 10 stocks you are most bearish on. This type of strategy is “market neutral” as the positions in the class overall are equally weighted, or nearly so. This is also the principle behind pairs trading.
Hedging Trading Strategies - Pros & Cons
Using a hedging strategy has both pros and cons.
Pros:
- Diversification
- Potentially smoothing out drawdowns
- Potentially smoother equity curve
Cons
- Has a high chance to reduce overall profit
- Adds to trading costs
- May be pointless and likely to cause psychological overcomplication
Hedging Regulations
There is only one country that has hedging regulations which impact retail Forex / CFD traders. This country is the USA, which imposes a rule known as FIFO (first in, first out), which stipulates open trades in the same asset of the same size, can only be exited in the order in which they were opened.
The regulation is imposed by the National Futures Association (NFA) on all US-regulated Forex brokers.
The FIFO regulation is often cited as banning hedging in the USA. This is not really accurate for two reasons:
- The regulation only applies to trades in the same assets, which are simple (dumb) hedges. These hedges are pointless anyway. The regulation does not affect complex (smart) hedges.
- The regulation only applies to trades of the same size, so it is possible to hedge for example 95% of a position size, and to be able to operate freely without any FIFO problem.
Bottom Line
Simple, “dumb” hedging is pointless. It tends to be used as a way for inexperienced traders to avoid the pain of taking a loss. You are better off using hard stop losses and accepting losses will happen than to use simple hedging strategies in the same asset.
Complex, “smart” hedging can make sense, but is most effective in investing or long-term trading strategies and styles where the time horizon is months or years. This is because good hedges often need time to really “play out” and show their benefits. It is not likely to be a strategy that add much profit to a day or swing trader.
Where hedging can really help is in building trading strategies in stocks, where you are looking to pick stocks for outperformance or underperformance. Here, options on an underlying index can be used relatively cheaply to hedge downside risk. Alternatively, an equally weighted long/short equity strategy, if well picked, should generate profit regardless of what the wider market does.
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