Risk trends have picked up considerably over the past weeks and months, and few currency pairs have proven immune to the resulting volatility. CHF/JPY is among those few pairs that has held up the ebb and flow of risk sentiment. The pair is comprised of two low yielding currencies and both currencies have been relatively unaffected by domestic economic data for many months. And, to top it off, the technical appeal of the CHF/JPY’s mature range is nearly unmatched in the FX market.
Hedging Strategy of the Week
Currency Pair: CHF/JPY
Entry Zone: Go both long and short at the market if spot is within the 97.00 – 100.20 range
Protective Stop: The long position’s stop should be set below 95.60 and the short position’s stop above 101.80 (or two ATRs beyond above the top of the range)
Profit Target: Long Target should be set below 100.20 and Short Target above 97.00 (with enough distance from these hard technical levels to increase the probability that price swing will reach the objective).
Profit Potential: 320 pips (excluding transaction costs and slippage)
There are few, broad ranges that have been as consistent as CHF/JPY’s consolidation channel over the past four months. To enter a hedge trader, enter both a long and short order at market anywhere within the above described Hedging Zone. Given the consistency of the range, the profit target and stop levels seem relatively straightforward. However, levels of support and resistance as consistent as these are often times run. Therefore, stops should be placed at or beyond the next significant technical level or two ATRs beyond our support and resistance to avoid being taken out on a ‘fake breakout.’
When should I use the hedging feature?
The most effective way to trade a market in which you are not sure if it will continue in the same direction or reverse is to find concrete support and resistance levels. Trading in such a price environment involves isolating currencies that are trading sideways in ranges (or channels), and then selling at the top and buying at the bottom of the channel. This allows you to pinpoint levels where significant price action will take place. Currencies that tend to trade sideways are often currencies with low interest rate differentials such as the EUR/CHF and the EUR/GBP.
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 http://www.fxcm.com/hedging.jsp
Do you think the CHFJPY range can hold up to risk sentiment and the yen’s wild volatility? Weigh in on the DailyFX Forum!
[I]Written By: John Kicklighter, Currency Analyst for DailyFX.com
To contact John about this or other articles he authors, email him at <[email protected]> [/I]