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Hedging Range Trades

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Singapore Dollar to Bounce from Historic Lows, Hedge Offers Downtrend Entry

Fri, Jul 18 2008, 06:27 GMT
by Ilya Spivak

DailyFX

Inflation worries in Singapore have dominated investor interest as the cost of living has risen a whopping 8.5% over the course of the past 12 months. To mitigate this rise, the Monetary Authority of Singapore (MAS) has been implementing an explicit strong SGD policy. During this same inflationary period, the Fed has been cutting rates aggressively to fight the onslaught of the housing crisis. Albeit US inflation is on the rise, traders are reluctant to price in a rate hike any time soon. Such is exhibited by the August Fed Funds Futures which show a 91% probability that the Fed will hold rates steady. In short the combination of a dovish Fed with a hawkish MAS will see the USDSGD downtrend continue in the near to medium term.

With interest rate expectations firmly in favor of a bearish bias, the technical outlook opens the door for a short-term retracement upward. USDSGD price action has been on a clear downtrend forming a bearish triangle. With the pair at double bottom support, a cyclical upturn may ensue. Our hedge target of 1.3590 lies at the 38.2% Fib retracement from the 06/13-07/15 sell-off. The stochastic oscillator is below the significant 20 level, hinting the pair is oversold and lending credence to a forthcoming retracement.

Hedging Strategy

Currency Pair: USDSGD

Long Term Bias: Bear
Long Term Position: Holding Short

Short Term Bias: Bullish
Short Term Position: Buy above 1.3485, Target 1.3590, Stop-Loss at 1.3425

Traders looking to protect their existing short USDSGD position or enter short at a favorable price may consider a hedge long USDSGD above 1.3485 with a target at 1.3571. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should USDSGD break out to the downside prior to the limit being hit. We will set the stop-loss near 1.3425.

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, Jul 18 2008, 06:31 GMT