Forex hedging is when you have an open trade and then open another trade in the oposite direction. The trade in the oposite direction acts as a hedge. The trader can open a 100% hedge by making the oposite position the identical size of the first trade or the hedge trade can be smaller making a partial hedge.
One reason a partial hedge may be used is to lock in profits. There are also many hedging strategies used in the forex market between different pairs.
Not all retail forex brokers allow the trader to hedge in this way. Sometimes when an opposite position is open, it results in closing the initial trade. This is because if you buy and sell the amount you end up with a net zero situation. It is important to check with your brokers policies on hedging if you wish to use hedging as part of your forex trading system. It is also a good idea to practice on demo for a while before trading live.
Perhaps two of the most popular forex hedging systems amongst retail forex traders is the USD/CHF Long and EUR/USD Long. These two pairs are highly correlated and strategies try to take advantage of this correlation.
The other common hedge trade is the long GBP/JPY and short CHF/JPY. This strategy is designed to allow the trader to earn the rollover interest on the long GBP/JPY position, whilst using the short CHF/JPY position to act as a hedge. It is high risk, but historically GBP/JPY and CHF/JPY have shared considerable correlation.
Correlation factors can change over time and often do, so these strategies are very high risk.