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Hedging Range Trades

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Kiwi Selling May Rest as Dollar Hits Support (Forex Hedging Strategy)

Wed, Dec 31 2008, 06:04 GMT
by Daily FX Research Team

DailyFX

New Zealand Dollar weakness has been of notorious mention since the RBNZ became yet another participant in the global trend towards rate slashing policies. In fact, the pair has plummeted 29.47% from its high in March. For the foreseeable future such a trend does not seem as though it will dwindle, especially on the backs of the Reserve Bank. With Q3 growth coming in negatively for the third consecutive period, Bollard and his board members may be forced to dwindle the substantial 475bp yield advantage that they have over the United States.
American central bankers, however, are virtually locked into a floor of low rates which can no longer continue to reach new lows. As the central bankers in the South Pacific country continue to battle the global recession, the domestic currency will probably suffer as further rate cuts continue deteriorate such sought-after yield.

For the time being, an opportunity to hedge one’s upside exposure is in the works. The pair has been seen traveling in a wedge shaped pattern since October with support being roughly 200 pips away. The entry rate, 0.5611, lies where the 23.6% fib level of the 09/22/08-11/20/08 sell off meets upward sloping support. Our target, 0.5813, lies below the 38.2% fib level and at wedge resistance. The stop-loss lies below support as any downside break may insinuate an end to the buying pressure.

Hedging Strategy

Currency Pair: NZD/USD

Long Term Bias: Bearish
Long Term Position: Holding short
Short Term Bias: Bullish
Short Term Position: Buy at 0.5611, Target at 0.5813, Stop-Loss at 0.5487

Traders looking to protect their existing short NZD/USD position or enter short at a favorable price may consider a hedge long NZD/USD above 0.5611 with a target at 0.5813. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should NZD/USD break out to the downside prior to the limit being hit. We will set a tight stop-loss near 0.5487, above multi-top resistance.

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, Dec 31 2008, 06:08 GMT