The greatest threat to ranges among the majors has come and gone. The Federal Open Market Committee’s rate decision proved to be market moving enough to rally NZDUSD to the top of a very broad range, but not surprising enough to push the greenback through major support levels across its pairings. This is an optimal situation for hedge and range-based trading. Though the employment report stands as looming event risk, the NZDUSD range looks durable enough to sustain any moderate shocks from scheduled event risk and offer a profitable trade within its broad range.
Hedging Strategy of the Week
Currency Pair: NZD/USD
Entry Zone: Go both long and short at the market if spot is within the 0.7900 – 0.7400 range
Protective Stop: The long position’s Stop should be set below 0.7250 (two ATRs below support) and the short position’s Stop above 0.8055 (two ATRs above the top of the range). Strong levels of support or resistance can be supplanted for an ATR reading.
Profit Target: The long Target should be set below 0.7900 and short Target above 0.7400 (with enough distance from these hard technical levels that the probability that price swing will reach the objective is high).
Profit Potential: 500 pips (excluding transaction costs, slippage and the placement of the targets within the range)
After today’s FOMC rate decision, NZDUSD rallied to put in for yet another test of resistance around 0.7900. While there is a moderate amount of risk in trading a range in any of the majors with the nonfarm payrolls report scheduled for Friday, the technical significance of the broad consolidation area looks as if it could survive significant, event-driven price moves. With NZDUSD very close to the top of the range, a hedge trade entry at current market prices is optimal as one side could quickly be knocked out for excellent position on a range trade with all the levels preset.
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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. 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
Notice any other strong ranges across the currency market? Share them with the DailyFX analysts and other traders at the DailyFX Forum.
[I]Written by: John Kicklighter, Currency Analyst for DailyFX.com
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