Pound Price Action Inching Lower, Hedge Offers Entry
The Pound has been gradually declining against the US dollar along a well-defined downward-sloping channel since mid-March. The latest price action sees the pair at the bottom of this channel, with the coming days sure to bring volatility as the Bank of England readies an interest rate announcement. The decision will be closely watched as policy makers are torn between offering monetary stimulus to contain fallout from the floundering UK housing market and battling commodities-fueled inflationary pressure. Shorts face near-certain volatility coupled with positioning at a major technical support level. This could well bring an up-swing to the channel top before further downside resumes.
Hedging Strategy
Currency Pair: GBPUSD
Long Term Bias: Bearish
Long Term Position: Holding Short
Short Term Bias: Bullish
Short Term Position: Long above 1.9490, Target 1.9897, Stop-Loss at 1.9416
Traders looking to protect their existing short GBPUSD position or enter short at a favorable price may consider a hedge long GBPUSD above 1.9490 with a target at 1.9897. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should GBPUSD break out to the downside prior to the limit being hit. We will set the stop-loss near 1.9416.
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.
DailyFX
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