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Hedging Range Trades

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Japanese Yen to Retrace Recent Gains against the Euro (Forex Hedging Strategy)

Thu, Dec 4 2008, 06:38 GMT
by Ilya Spivak

DailyFX

Technically, we see EURJPY has consolidated in a triangle formation since late October. Prices are now squarely at the bottom and showing initial signs of a pull-up. On balance, a triangle is typically considered a continuation pattern, so the eventual breakout favors the downside because the trend prior to consolidation was definitively bearish. That said, the aforementioned seasonal forces could easily see the pair pull up to test the formation’s upper boundary before the downtrend continues.

Hedging Strategy

Currency Pair: EURJPY

Long Term Bias: Bearish
Long Term Position: Holding Short

Short Term Bias: Bullish
Short Term Position: Long near 118.00-50, Target 122.57, Stop-Loss at 115.97

Traders looking to protect their existing short EURJPY position or enter short at a favorable price may consider a hedge long EURJPY near 118.00-50 with a target at 122.57. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should EURJPY break out to the downside prior to the limit being hit. We will set the stop-loss at 115.97.

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  Thu, Dec 4 2008, 06:42 GMT