Opening a position that partially or fully offsets the risk of an existing trade or portfolio.
A trader long EUR/USD might hedge with a short GBP/USD position to reduce overall USD exposure while maintaining European currency sensitivity. Corporations hedge transactional FX risk to protect revenue forecasts.
Some brokers allow direct hedging (holding simultaneous long and short on the same pair), though US regulations prohibit this. Cross-pair and options-based hedges are more common in institutional practice.