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Hedging Range Trades

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USDCHF Hedge Opens Entry to Dollar Rally

Fri, Jun 6 2008, 12:14 GMT
by Ilya Spivak

DailyFX

As anti-dollar sentiment reached its peak mid-March, the Swiss Franc overcame parity with the US dollar to reach a historic low at 0.9644. The franc derived additional strength from its status as a safe-haven currency, gaining additional momentum as the dollar sell-off intermingled with intense bouts of risk aversion. As it became increasingly clear that Europe and Asia would not decouple from US slowdown towards the end of the first quarter, the greenback began a slow retracement from the lows.

USDCHF price action is now showing a Flag pattern indicative of continuation for the fledgling bullish trend. With the pair trading just below resistance just days before the markets expect to see May Non Farm Payrolls shrink -52k, there is a substantial possibility that the pair will retrace lower before a topside breakout is to materialize.

Hedging Strategy

Currency Pair: USDCHF

Long Term Bias: Bullish
Long Term Position: Holding Long

Short Term Bias: Bearish
Short Term Position: Short below 1.0490, Target 1.0290, Stop-Loss at 1.0540

Traders looking to protect their existing long USDCHF position or enter long at a favorable price may consider a hedge short USDCHF below 1.0490 with a target at 1.0290. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should USDCHF break out to the upside prior to the limit being hit. We will set the stop-loss near 1.0540.

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 http://www.fxcm.com/hedging.jsp.

Published on  Fri, Jun 6 2008, 12:26 GMT