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A Short-Term Hedge Could Keep A Trader On The Right Side Of A GBJPY Break

The fight between risk aversion and risk appetite over the past 48 hours, triggered by milestone lows in the world’s most liquid currency and fears of a possible recession in the largest economy, have had a particularly fierce impact the yen and swiss denominated pairs. The unnerved markets have also threatened to force a breakout in the already volatile GBJPY. Before the winds of risk began to pick up, GBJPY was already looking a potentially momentous breakout as a long term falling trend channel was confronting a rather consistent and clear ascending triangle. Now the pair is left with only 300 points in which to move; and a breakout seems imminent. Considering this pair’s volatility and the high probability of a breakout, a hedged position until direction is confirmed after the break could save a trader from considerable losses from being on the wrong side of the move.


Hedging Strategy of the Week

Currency Pair:   GBPJPY

Long Term Bias:  Bearish
Long Term Position:  Holding Short (from 11/01 swing high at 241.36)

Short Term Bias:  Bullish
Short Term Position: Long Against 210.00, Target Falling Trendline (213.00 for 02/27)

The risk-sensitive GBPJPY has been carving a downward sloping trend since November. For those traders that have a long-term short position on their books (from a higher level or perhaps speculating on a break in this direction), they should hedge their trades from a potential rally that could overturn a mature trend. Establishing a long GBPJPY hedge around 210.75 will not only cover potential drawdowns during consolidation activity up to 213, it could also dramatically reduce losses in the event of an upside breakout. A stop on the hedge position should be set around 209 to allow the short to collect profit should bearish momentum develop. Alternatively, the primary short should also have a stop above 214 to allow the hedge trade to take over in the event of an upside breakout. 

When should I use the hedging feature?

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 http://www.fxcm.com/hedging.jsp

Written By: John Kicklighter, Currency Analyst for DailyFX.com

To contact John about this or other articles he has authored, email him at jkicklighter@dailyfx.com.

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