I am new to FX and I came accross an article stating that the safest way to play FX is by hedging. It was suggested that you buy eur/usd and usd/chf at the right entry with the right ratio. WHat would be the right ratio. What other pairings is good buy to hedge and at what ratios.
The best 4x pairs to hedge are the us pairs…eur/usd, gbp/usd, usd/chf, usd/jpy
You have to buy specific amounts to balance the amount of daily interest paid in or out so you receive interest every day.
The amount of each pair you buy depends on the ask at any given point in time.
When hedging pairs to get paid daily interest you are in essence investing in the forex market, not trading in the market. This is less volatile EXCEPT when there is a catastrophic meltown and all the pairs you are holding move down in the same direction. however you can survive and bounce back in these situations if you have not over traded your account …on the other hand should they move up in the same direction you get a windfall…all the while collecting daily interest.
The hedge is based on correlations between currency pairs that are averaged out over time…for instance, you may notice that when the euro/usd goes up, 90% of the time the usd/chf goes down, thus balancing your profit at a neutral postion while allowing you to hold a position and collect interest over a LONG period of time. Same happens when the usd/jpy goes up the gbp/usd goes down.
What pairs or combo of pairs you hedge determine the risk and amount of interest you receive. least risky pits the eur/usd vs the usd/chf…Riskiest due to possible large movements are the gbp/usd vs usd/jpy
You always hedge and go long (buy)in these combos: (leaving out the usd for quicker typing
euro vs chf
euro vs yen
euro vs yen plus chf
pound vs chf
pound vs yen
pound versus yen plus chf
or euro plus pound versu yen
euro plus pound versu chf
euro plus pound versus chf plus yen
Now the million dollar question…How do you know what qty of lots to buy for your hedge…Well, you can use complex math to figure out at any given price how many of each pair do you buy so you are always paid interest.Or you can do what I did and scoured the internet for cheap software that does the picks for you…I don’t want to advertise for anyone but I found my system at bluecsi.com
Hope this helps a bit…good luck
Essentially, what is being described above is known as a carry trade. It boils down to being long higher paying currencies and shorting lower paying ones. That’s all fine and good. Some very big investors have been doing that quite profitably for some time now.
Keep in mind that some of the so-called hedge trades outlined here and in other places are really just altering your currency exposure. If you buy EUR/USD and buy USD/CHF (the two are negatively correlated) then you end up with a net long EUR/CHF position, and maybe a small USD exposure in there somewhere, depending on your trade ratio. So your exchange rate risk is primarily in EUR/CHF.
Actually, it could be argued that you are better off just buying EUR/CHF rather than legging into that hedge because you’ve got both the price and the interest rate spread going against you in both legs.
Here’s what I mean.
According to Oanda, right now owning EUR/USD would have you in a net carry position of -1.575%, while for USD/CHF you’d be net positive 2.125% on carry, for a spread of 0.55%. The net carry for EUR/CHF is 1.1% to the good. That means that in buying EUR/USD and buying USD/CHF you would only make half as much carry as if you bought an equally sized EUR/CHF position.