There is a clear counter-trend move developing in the GBPUSD. After four consecutive days of declines, the pair is now at a point of support found on the double touch of a previous swing low whose low was set at 1.9335.
Technicals beyond this double touch are light, with only an internal trendline reinforcing this floor. In contrast, the long-term bear trend channel from the November 9th swing high remains intact - even after the swing high over the past two weeks. Long-term sterling bears (or those that are now aligning themselves to the market’s larger trend) should hedge against this coming rebound to maintain their strong entry prices and immunize themselves from any drawdowns that could be taken during the rebound.
[B]Hedging Strategy of the Week[/B]
[B]Currency Pair: [/B] GBPUSD [B]Long Term Bias:[/B] Bearish [B]Long Term Position: [/B] Holding Short (from 11/09 swing high at 2.1160) [B]Short Term Bias: [/B] Bullish [B]Short Term Position:[/B] Long Against 1.9335, Target Falling Trendline (1.9640 for 01/21) Long-term GBPUSD bears have held a very lucrative position, but it has not come without its periods of counter-trend rebounds. Now, over the past month, the pair has set up a potential floor with a loose triple bottom. Those that already have profitable short positions on should not exit as the long-term trend is still intact. Instead, a short-term hedge should be established around recent levels to offset a potential rebound from support around 1.9350/400. The target for the shot-term long should be at the top of the channel and its stop should be just below support. Should GBPUSD break the channel and clear the previous swing high, the long-term position should be reconsidered.
[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