hedging range trades

Bank of Japan Rate Expectations May Usher Yen Selling Against Pound (Forex Hedging Strategy)

Thursday, 18 December 2008 05:07:20 GMT  |  Luis Gil, DailyFX.com

Yen strength has been nothing new, especially against the British Pound. GBPJPY has fallen by as much as 38.72% since July. Sterling sentiment reached a low point at the end of last week as the pair hit a 13-year low after risk-averse investors fled on news that the U.S. Senate had rejected the automaker bailout plan. Such volatility leads one to wonder if the trend will continue to unfold. With the Bank of England in firm position to do whatever necessary to abate the financial storm the Japanese Yen may continue to resume its dominance. Tonight’s Bank of Japan decision, if they indeed cut rates slightly more, may temporarily boost the pair’s attractiveness. But as Mervyn King increases the use of his bank’s firing power, the selling spree will probably continue.

For the time being, an opportunity to hedge one’s upside exposure is in the works. A buying trend shows bearish divergence with the RSI oscillator, suggesting the latest lows have been met with dwindling selling strength. We will look to our 13-year low at 132.14 to buy and towards downward resistance at 137.51 to exit the trade. Here too, we will look for buying opportunities as the dominant trend regains momentum.


Hedging Strategy

Currency Pair: GBPJPY

Long Term Bias: Bearish
Long Term Position: Holding short
Short Term Bias: Bullish
Short Term Position: Buy above 132.14, Target 137.51, Stop-Loss at 129.15

Traders looking to protect their existing short GBPJPY position or enter short at a favorable price may consider a hedge long GBPJPY above 132.14 with a target at 137.51. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should GBPJPY break out to the downside prior to the limit being hit. We will set a tight stop-loss near 129.15, below 13-year lows.

Created Using FX Trek IntelliChart – Prepared by Luis Gil


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 Luis with comments regarding this or other articles he has authored, please email him at lgil at dailyfx dot com.

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