hedging range trades

Australian Buying to Pullback Against New Zealand Dollar (Forex Hedging Strategy)

Wednesday, 24 December 2008 04:53:52 GMT  |  Ilya Spivak, Currency Analyst with Luis Gil, DailyFX.com

The beginning of October saw the Australian Dollar bullishly rebound from the kiwi’s buying spree. As the RBNZ aggressively slashed interest rates in an effort to pad its three consecutive quarters of negative growth, traders began selling the isle-nation’s currency. RBA officials too drastically cut overnight rates on fears that the slowing global economy would soon hit home. However, Australia has thus far been able to stay afloat as no quarterly period has been subject to negative growth. Bloomberg forecasts, for at least the next four three-month periods, call for continued, albeit slowing, increases in gross domestic product. Recent comments by New Zealand Prime Minister John Key have shed no positive light on his economy; he as stated that expansionary growth figures won’t be expected until 2010. With the fundamental picture heavily in favor of the Australians the prospects for a resurgence of New Zealand Dollar strengths are minimal.

For the time being, an opportunity to hedge one’s downside exposure is in the works. A buying trend shows price action hitting multiple-top resistance in the near-future. The entry rate, 1.2282, has been a source of significant selling pressure, spanning from August of this year. As such, we may see a short-term retractive pullback that may lead the pair towards the bottom of the channel shown in the chart below. We will set our target at the intersection of channel support and the 23.6%, 1.1888, fib level of the 10/10-12/08 bull-run. Furthermore, we will set our stop-loss substantially higher than the multiple-top resistance level.


Hedging Strategy

Currency Pair: AUDNZD

Long Term Bias: Bullish
Long Term Position: Holding long
Short Term Bias: Bearish
Short Term Position: Sell above 1.2282, Target - 1.1888, Stop-Loss at 1.2514

Traders looking to protect their existing long AUNZD position or enter long at a favorable price may consider a hedge short AUDNZD above 1.2282 with a target at 1.1888. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should AUDNZD break out to the upside prior to the limit being hit. We will set a tight stop-loss near 1.2514, 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.


To reach Ilya and Luis with comments regarding this or other articles they have authored, please email them at research at dailyfx dot com.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars