special reports

EUR/USD - The Best Pair to Apply a Hedging Strategy This Week

Wednesday, 04 April 2007 15:50:01 GMT  |  Antonio Sousa, Currency Analyst

§         Entry Zone: Go both long and short at the market if the price is at any level within the 1.3300-1.3385 range

§         Protective Stop: Long stop some pips below 1.3245 and short Stop slightly above 1.3415

§         Profit Target: Long Target at 1.3385 and Short Target at 1.3300

§         Profit Potential: 85 pips (excluding transaction costs and slippage)

For Currency Pairs that are trading sideways, HEDGING is the best strategy to implement.  This involves putting a buy and sell order in the same currency pair at the same time – in one account.  Every day, we rank the major currency pairs by suitability for hedging. 

Rules for Following the Hedging Radar

1)       Entry Zone -> Go both long and short at the market if the currency is at any level within the Hedging Zone. 

2)       Profit Taking ->Target for the long order is the top of the entry zone, for the short order is the bottom of the entry zone.

3)       Stop Levels are Key Support and Resistance Points -> Place the actual stops a few pips above the higher level and a few pips below the lower level. The break of these levels signals that the ranges have been broken and the hedging strategy should no longer be implemented.

4)       The lower the Average True Range, the Less Risky the Currency is for Hedging.

Low Risk Hedging Opportunities - Currencies that are Ranging
Currency	% ATR Rank	Stop for Long	Hedging Zone		Stop for Short	Profit Range (in Pips)
EURCHF	|||||| 0.34%	1.6170	1.6198	1.6300	1.6350	102 pips
EURGBP	||||||||| 0.46%	0.6723	0.6748	0.6792	0.6813	44 pips
USDCAD	||||||||||| 0.59%	1.1430	1.1528	1.1635	1.1679	107 pips
GBPCHF	|||||||||||| 0.60%	2.3975	2.4002	2.4305	2.4386	303 pips
EURUSD	|||||||||||| 0.61%	1.3245	1.3300	1.3385	1.3415	85 pips
Medium Risk Hedging Opportunities - Currencies that are Volatile
Currency	% ATR Rank	Stop for Long	Hedging Zone		Stop for Short	Profit Range (in Pips)
EURAUD	|||||||||||| 0.65%	1.5966	1.6367	1.6424	1.6574	57 pips
GBPUSD	||||||||||||| 0.67%	1.9675	1.9726	1.9847	1.9914	121 pips
AUDUSD	||||||||||||| 0.70%	0.7945	0.7979	0.8180	0.8351	201 pips
CHFJPY	||||||||||||| 0.71%	96.59	96.86	97.45	97.89	59 pips
EURJPY	|||||||||||||| 0.75%	155.76	156.23	158.61	158.99	238 pips
High Risk Hedging Opportunities - Currencies that are Trending
Currency	% ATR Rank	Stop for Long	Hedging Zone		Stop for Short	Profit Range (in Pips)
USDJPY	||||||||||||||| 0.77%	115.76	116.37	118.97	119.22	260 pips
GBPJPY	||||||||||||||||| 0.88%	232.09	233.01	235.36	236.33	235 pips
AUDJPY	|||||||||||||||||| 0.91%	95.76	95.91	97.00	97.50	109 pips
NZDUSD	||||||||||||||||||| 0.97%	0.7096	0.7120	0.7250	0.7463	130 pips
NZDJPY	||||||||||||||||||||| 1.22%	84.65	85.15	85.57	85.79	42 pips
USDCHF	||||||||||||||||||||| 2.02%	1.1877	1.2027	1.2259	1.2375	232 pips

 

 

**How is the % ATR Rank Calculated?

 

The average true range is the 90 days moving average of the currency’s true range. The true range is the greatest of: the difference between the current high and the current low; the difference between the current high and the previous close or the difference between the current low and the previous close.

 

The %ATR is the relative value of the ATR when weighted against the price. For example, if the ATR for the EURGBP is 26 pips then the %ATR is 0.4 percent since 0.0026/0.6602 = 0.4% where 0.6602 is the quoted price of the EURGBP.

 

Hedging Strategy of the Week

§         Entry Zone: Go both long and short at the market if the price is at any level within the 1.3300-1.3385 range

§         Protective Stop: Long stop some pips below 1.3245 and short Stop slightly above 1.3415

§         Profit Target: Long Target at 1.3385 and Short Target at 1.3300

§         Profit Potential: 85 pips (excluding transaction costs and slippage)

 

The EUR/USD is our primary target for hedging in the week ahead, with clear range-bound trade and concrete support and resistance levels. To hedge, go both long and short at the market if price stays within the above Hedging Zone. Take profits at R1 for longs and at S1 for shorts, covering losses above R2 or below S2. 

 

Want More Information on Hedging?

The most effective way to capitalize on currencies pairs that trapped in tight ranges is through the use of hedging. 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 

 

 

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