Though NZD/USD volatility has risen over the past six months, the pick up in price action has been contained to a congestion trend since the end of September. The pair’s broad channel and relative higher volatility make it an attractive pair to hedge trade as spot may range between our profit targets more quickly.
[B]
Currency Pair[/B]: NZD/USD
[B]Entry Zone[/B]: Go both long and short at the market if spot is within the 0.7950 – 0.7550 range
[B]Protective Stop[/B]: The long position’s stop should be below 0.7350 and the short position’s stop above 0.8150 (or two ATRs beyond the channel as it rises)
[B]Profit Target[/B]: Long Target at 0.7950 and Short Target at 0.7550 (The targets should be adjusted as the channel rises)
[B]Profit Potential[/B]: 400 pips (excluding transaction costs and slippage)
Given the consistency of the NZD/USD trend channel over the past three and a half months, it presents an attractive hedge candidate. To enter the trade, enter a long and short order at the market as long as prices are within the Hedging Zone. This is an unusual Hedge trade, however, as the channel the pair is trading within has a positive slope. Therefore, an initial profit target of 0.7950 (the first level of resistance) for the long leg and 0.7550 (the first level of support) for the short leg should be adjusted as the channel rises. At the same time, the initial short order stop at 0.8150 (the second level of resistance) and long order stop at 0.7350 (the second level of resistance) should be adjusted as the range advances.
[B]When should I use the hedging feature?[/B]
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; and at the same time removes the risk of having to determine and catch major tops and bottoms. 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 What Is A Hedge Ratio? - FXCM UK
Do you see any other hedging potential for other range bound pairs? Discuss these trades in the DailyFX Forum.
[I]Written By: John Kicklighter, Currency Analyst for DailyFX.com
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[I]Contact John Kicklighter about this article at <[email protected]> [/I]