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Strategy hedging Forex trades
Hedging is the process of buying one asset and simultaneously selling another in the hope that losses from one transaction will offset profits earned in another. This method works best when these two asset correlated negatively. This is the meaning of effective hedging – You should choose two perfect pairs with return correlation.
If the hedging strategy chosen, it can lead You to profit in both agreements. So what is meant by an the hedging strategy for currency markets?
The opening of the market in the UK or USA
The first step in the search strategy of hedging is based on the observation the US market or the UK during the first hours after their opening. This is a time when the market activity is at its peak and this period often sets the tone for the whole day.
Explore "Forex space" as a whole, at different intervals and try to understand which currencies rise and fall against the greenback. Then, select the currency that has fallen or increased the least, and it will be Your pair for directional trading. And find another pair that should stay relatively stable, and we'll call it Your hedge pair.
For example, for the first time after the opening of the trading session in the UK, the US dollar shows signs of strengthening. EURUSD is decreasing -0.20 %, GBPUSD is reduced by -0.45 %. CADUSD pair is reduced at -0.40 %, and the JPYUSD – -0.65 %.
As we can see, EURUSD is falling slower, so we will pick this pair for our directional trading. As EURUSD falls slower, it has the maximum comparative strength. This means that in the event of a change of market direction the EURUSD will rise stronger than other couples.
Now, when we decided on buying EURUSD for directional trading, we should choose a currency pair, which you can sell Euro in order to create a hedge. In this case, we can see that JPY is showing relative weakness compared to other currencies. Thus, the best choice for a hedge pair EURJPY. So, our hedge strategy consists of buying EURUSD and EURJPY sales. Terms of risk management must be met for both agreements.
Valid for one session
The hedging strategy works because it uses the momentum of the market. In other words, jointly operated and the Euro (EUR) and the weakness of the Japanese yen (JPY), and since the opening session is the most important interval for currency pairs, this momentum should persist until the next session.
An hour before the next session, the momentum will probably wane as the market begins to gain new players. Thus, before closing the current session must be closed and the hedged transactions. But here begins the next session, and You can already look like a couple, suitable for a hedge trade.
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| Category: Forex | Added by: (30.10.2017)
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| Views: 258
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