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Hedging Range Trades

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Australian Dollar to Correct Against the Franc, Hedge Offers Down Trend Entry

Wed, Jul 9 2008, 05:56 GMT
by Ilya Spivak

DailyFX

Global risk aversion drove AUDCHF to sell off in late October as traders flocked to dump carry trades. This downtrend continues as Australia’s economy suffers under the weight of record high interest rates following 12 consecutive RBA hikes to curb the fastest-growing inflation in nearly two decades. Consumer Confidence has declined to the lowest in 16 years, while Business Confidence now rivals lows unseen since September 2001. Equity markets have reflected the souring conditions with Australia’s S&P/ASX 200 index expected to fall 21% this year, surpassing the losses suffered in the United States, U.K., and Japan. Meanwhile, the Franc has gained a modicum of added strength as expectations of a one-off SNB rate are furthered by continued tightness in the labor market and persistently rising energy prices.

Recent AUDCHF price action has been confined to a clearly defined downward channel. The stochastic oscillator has remained out of oversold territory, agreeing with overall downward sentiment. Current positioning sees the pair testing support in nearing days, suggesting a temporary upward reversal will follow.

Hedging Strategy

Currency Pair: AUDCHF

Long Term Bias: Bearish
Long Term Position: Holding Short

Short Term Bias: Bearish
Short Term Position: Short above 0.9638, Target 0.9901, Stop-Loss at 0.9520

Traders looking to protect their existing short AUDCHF position or enter short at a favorable price may consider a hedge long AUDCHF above 0.9638 with a target at 0.9901. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should AUDCHF break out to the downside prior to the limit being hit. We will set the stop-loss near 0.9520.

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  Wed, Jul 9 2008, 06:01 GMT