CHFJPY Hedge to Cover Longs Through 380-pip Drawdown

The Swiss Franc has been trending higher against the Yen since late November of 2000. With both CHF and JPY traditionally used as funding currencies for carry trades when paired with other currencies, their relationship among themselves has been primarily driven by the slightly higher yield offered by the SNB versus the BOJ. With both monetary authorities now firmly on hold, there is little reason to believe the underlying conditions guiding the pair’s broad direction will change in the near term. That said, CHFJPY does tend to oscillate in wide ranges along its upward trajectory. This can mean substantial swings in P/L for traders holding long-term CHFJPY positions.

Price action has seen the pair confined to a neat upward-sloping corridor since August of last year. Current trading has taken CHFJPY to the upper boundary of this corridor, with the Slow Stochastic oscillator topping out above the key 80 level and appearing to favor a reversal. A bearish Hanging Man candle now appears at resistance, lending further credence to a near-term selloff.

[B] Hedging Strategy[/B]

[B] Currency Pair:[/B] CHFJPY

[B] Long Term Bias: [/B]Bullish
[B] Long Term Position: [/B]Holding Long

[B] Short Term Bias:[/B] Bearish
[B] Short Term Position: [/B]Short below 103.40, Target 99.59, Stop-Loss at 104.31

Traders looking to protect their existing long CHFJPY position or enter long at a favorable price may consider a hedge short CHFJPY below 103.40 with a target at 99.59. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should CHFJPY break out to the upside prior to the limit being hit. We will set the stop-loss near 104.31.

[B]When should I use the hedging feature?
[/B]
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 What Is A Hedge Ratio? - FXCM UK.

[I]To reach Ilya and Luis with comments regarding this or other articles they have authored, please email them at <[email protected]>.[/I]