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Hedging Range Trades

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Hedging Through USDJPY Retrace Protects Longs, Offers Entry

Thu, May 15 2008, 07:40 GMT
by Ilya Spivak

DailyFX

As the worse of risk aversion abated, USDJPY began to lift from March lows at 91.71 to enter into what is now a nearly 2-month long uptrend. Price action had been guided by an upward sloping trend line, a support that has recently been broken as USDJPY settled into consolidation between the 38.2% and 50% Fibonacci retracements of the 12/27/07-03/17 decline at 102.91 and 105.17, respectively. The first test of Fib resistance failed and allowed Yen bulls to push USDJPY through trend line support to rest at the lower Fib level. The decline lost steam here and has oscillated higher again. Now again at resistance, we see the level has been made more difficult to penetrate with the trend line turned from support to resistance. We see a strong possibility of another pullback before bullish momentum resumes in earnest.

Hedging Strategy

Currency Pair: USDJPY

Long Term Bias: Bullish
Long Term Position: Holding Long

Short Term Bias: Bearish
Short Term Position: Short below 105.17, Target 103.23, Stop-Loss at 105.91

Traders looking to protect their existing long USDJPY position or enter short at a favorable price may consider a hedge short USDJPY below 105.17 with a target at 103.23. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should USDJPY break out to the upside prior to the limit being hit. We will set the stop-loss near 105.91.

When should I use the hedging feature?

Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.

The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.

For more information on FXCM hedging strategies please visit ttp://www.fxcm.com/hedging.jsp.

Published on  Thu, May 15 2008, 07:44 GMT