For Currency Pairs that are trading sideways, HEDGING is the best strategy to implement. This involves putting a buy and sell order in the same currency pair at the same time in one account. Every day, we rank the major currency pairs by suitability for hedging.
Rules for Following the Hedging Radar
1) The Lower the ATR, the Less Risky the Currency is for Hedging**
2) Entry Zone = Profit Targets -> Go both long and short at the market if the price is within the Entry Zone. Target for the long order is the top of the entry zone. Target for the short order is the bottom of the entry zone. The goal is to buy and sell as close to the tops and bottom of the entry zone as possible.
3) Stop Levels are Key Support and Resistance Points -> Use discretion with these levels. Place the actual stops a few pips above the higher level and a few pips below the lower level. The break of these levels signals that the ranges have been broken and the hedging strategy should no longer be implemented.
**How is the % ATR Rank Calculated?
The average true range is the 90 days moving average of the currencys true range. The true range is the greatest of: the difference between the current high and the current low; the difference between the current high and the previous close or the difference between the current low and the previous close.
The %ATR is the relative value of the ATR when weighted against the price. For example, if the ATR for the EURGBP is 26 pips then the %ATR is 0.4 percent since 0.0026/0.6602 = 0.4% where 0.6602 is the quoted price of the EURGBP.
Hedging Strategy of the Week
· Currency: GBP/CHF
· Entry Zone: Go both long and short at the market if the price is within the 2.3975 - 2.4211 range
· Profit Target: Long Target at R1: 2.4211 and Short Target at S1: 2.3975
· Protective Stop: Long Stop below S2: 2.3821and Short Stop above R2: 2.4352
· Profit Potential: Approximately 200 pips ( including transaction costs)
The GBPCHF is our primary target for hedging in the week ahead, with clear range-bound trade and concrete Support and Resistance levels. To hedge, go both long and short at the market if price stays within the above Hedging Zone, take profits at R1 for longs and S1 for shorts, covering losses at R2 of 2.4352 and S2 of 2.3821. This takes the guesswork out of timing the market, providing trading opportunities within clearly defined price floors and ceilings.
Want More Information on Hedging?
The most effective way to capitalize on currencies pairs that trapped in tight ranges is through the use of hedging. The hedging feature is currently available on all accounts using FXCMs No Dealing Desk service. For more information on FXCM hedging strategies please visit http://www.fxcm.com/hedging.jsp