The GBPJPY is once again a top candidate for a short-term hedge position to protect profitable trades behind the long-term, dominate trend from small, counter-trend moves that have developed over the past few days. Once again, risk appetite is having its influence over price action; but this time around, moderate fundamentals may be playing a hand in the burgeoning rebound. The nearly 350-point rebound in the pair this time around seems to have been triggered by a weak, fourth quarter capital spending report from Japan.
Aside from this single report, fundamental pressures are almost consistently bearish for this pair. Aside form a record low in a UK consumer sentiment report, risk aversion is still heavy as credit market troubles have been revived with expectations that monoline insurer Ambac may fail to garner the necessary capital to secure its top debt rating. A hold from the BoE may provide an additional pound boost, but the long-term rate outlook aligns nicely to the long term technical trend.
[B]Hedging Strategy of the Week[/B]
[B]Currency Pair[/B]: GBPJPY
[B]Long Term Bias[/B]: Bearish
[B]Long Term Position:[/B] Holding Short (from 11/01 swing high at 241.36)
[B]Short Term Bias[/B]: Bullish
[B]Short Term Position[/B]: Long Against 203.50, Target Falling Trendline (211.60 for 03/05)
The broad GBPJPY trend channel from the November swing high still stands as the dominate trend. Recently, however, the pair failed to generate substantial follow through in an initial downside break below 205. For those traders that are looking to hold with long-term trend and are perhaps already in profitable, short positions from a higher level, a short-term hedge would be wise to eliminate a drawdown with a higher GBPJPY bounce. A hedge should be established to the long side with an initial target of 213.85 and with a stop below the recent swing low at 203.50. Should the hedge position meet its target or stop, it will once again open exposure to the long-term short to profit from the next leg down. A stop on the primary, short on a trend change should be set well above 213.85.
[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]Written by: John Kicklighter, Currency Analyst for DailyFX.com
To contact John about this or other articles he has authored, you can email him at <[email protected]>. [/I]