Forex hedging is when someone trading in currency enters into a trade with the intention of safeguarding an anticipated or existing position from an undesired shift in the foreign currency exchange rates. By properly using a forex hedge, a trader that is short on a foreign currency pair can protect themselves from upside risk, and conversely, a trader that is long will be able to protect themselves from downside risk.

Simply explained, hedging is nothing more than protecting your investment in the case of something bad happening. A good way to understand hedging is to compare it to health insurance. You have protection in case something happens to you, but it will not prevent something bad from happening to you. If something does happen, however, you will be much better off than if you didn't have the insurance.