Having put in a double top at the 0.9500 level, the AUDUSD retraced back to support at the upward sloping trend-line established on 08/16/2007. The pair started the week showing a Morning Star candlestick reversal pattern at support, suggesting the retracement is over and the bullish run is set to resume. However, the ascent has paused as price action encountered a downward sloping resistance line at 0.9170.
Looking closer at the 4-hour chart, we notice the downward-sloping resistance line also coincides with a 50-day Moving Average, suggesting the bullish run may pause for a short retracement here.
[B]Hedging Strategy
Currency Pair:[/B] AUDUSD
[B]Long Term Bias:[/B] Bullish
[B]Long Term Position: [/B]Holding Long (from 03/24 Bull Trend test)
[B]Short Term Bias: [/B]Bearish
[B]Short Term Position:[/B] Short below 0.9170 (50 SMA, Trend line), Target 0.8970 (Bull Trend Line)
Traders looking to protect their established long AUDUSD position or enter the long-term trade at a favorable price may consider a hedge short AUDUSD below 0.9170 with a target at the trend line test price above 0.8970. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge should the pair break out to the upside prior to the limit being hit. We will set the stop-loss at 0.9220, a shorter term support/resistance area.
[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.
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To reach Ilya with comments regarding this or other articles he has authored, please email him at <[email protected]>.[/I]