Posted: 19 May 2010 02:00 AM PDT

One of the popular hedging methods in forex is buying and selling the same currency at the same time and eventually making a profit out of it. Here’s an explanation of how this interesting system works, and a few tips that will help reducing the risks. And there are risks.

The system

The trader buys and sells the same currency pair at the same time. For example, he sells EUR/USD at 1.3300 and buys it at the same price in a separate position. When the market moves in a specific direction with a significant distance, such as 100 pips for this pair, the trader closes the winning position and leaves the losing one open. Let’s assume EUR/USD went down to 1.3200 – the trader closes the short position and leaves the long position open.

He then opens two new positions – buying and selling at the new price. If the price goes back to the starting point, 1.3300, the trader closes all three open positions – the initial long position is now even, and the two new positions balance each other. The trader won the profit of the first short position. More details can be found here.

Too simple? That’s right. Let’s get into details and give some tips.

Not for new traders: if you’re new to forex trading, don’t use this system. This system is complex and tricky, and isn’t suitable for many traders.
Not with every broker: the NFA rules that were instated in August 2009 were intended to prevent forex hedging. While these rules are not full proof, you will probably find it impossible to use this method due to the First In First Out rule – you might not be able to close the position you want to close. In addition to the NFA rules, some brokers, also outside the US, forbid hedging. Make sure that it’s possible before entering a position.
Automated execution: Now that we’ve cleared the cases that hedging isn’t desired or isn’t possible, let’s see how it can be done. In order to be able to buy and sell at the same price, and also to perform the second set of buying and selling, automatic execution of orders is necessary. An EA can supply this solution.
Timing: This method works when the markets go sideways – this method taps into the movements that are limited to a range. If there’s an important release coming for one of the currencies involved, there’s a good chance that the pair will get out of the range. The Non-Farm Payrolls release is a perfect example of a bad timing. Forex hedging isn’t good for breakouts – only for sideways movements.
Large pip range: a small range will not work. Remember that each position involves a commission or a spread that might take a big bite out of the profit in this system. In addition, if you move to the second set of positions after the market made a small move, it could continue in the same direction. This doesn’t necessarily need to be a breakout. Bigger ranges will work better.
Patience: If the market moves slowly and doesn’t reach any targets, you have nothing to worry about. In the meantime, the opposite positions balance each other. Don’t try to reduce the range in order to proceed to the next step. As aforementioned, this may break the system.
Re-evaluate: After 5 or 10 rounds of hedge trading, take a break and evaluate your performance. Did it work due to lucky market movement, or due to following a successful pattern? Did it fail due to a wrong plan, wrong execution? If you found a pattern that works for you, great! If not, let’s get back to tip no.1 – maybe the system isn’t for you, and that’s OK.

Have experience with forex hedging? I’d love to hear your comments.

Want to see what other traders are doing in real accounts? Check out Currensee. It's free.

Forex Daily Outlook – May 19 2010

Posted: 18 May 2010 02:00 PM PDT

US CPI is expected to rise, the US, Federal Open Market Committee Meeting Minutes is released and Canada’s Wholesale Sales are also on the rise.Let’s see what awaits us today.

In the US, unlike the decrease of PPI index yesterday the CPI is expected to rise from 0.1% to 0.2% as well as the Core CPI which is foreseen to increase by 0.1% from 0.0% last month.

Later in the US, Federal Open Market Committee Meeting Minutes is released with a detailed record of the FOMC’s most recent meeting, providing in-depth insights into the economic conditions. This affects interest rates.

Also in the US, Crude Oil Inventories is expected a sharp drop from 1.9M last month to 0.6M which should affect inflation rates.

Finally in the US, Mortgage Delinquencies released quarterly, showing the number of mortgages delinquent with foreclosures is supposed to remain 9.47%.

In Canada, continuing the positive news from Canada, Wholesale Sales are expected to edge up from -1.2% to 0.3% indicating an increase in consumer’s spending.

For more on USD/CAD, read the Canadian dollar forecast.

In Europe, ECB President Jean-Claude Trichet speaks at the ceremony laying the foundation stone of the New ECB Premises, in Frankfurt. Will affect the Euro currency and provide clues for future monetary policy.

Later in Europe, Deutsche Bundesbank President Axel Weber speaks about the G20 agenda on financial regulation, in Berlin which will affect currency rates.

For more on the Euro, read the EUR/USD forecast and Casey Stubbs' latest analysis.

In Great Britain, MPC Meeting Minutes voted 9-0 to maintain rates the same vote of past months.

More in Great Britain, Chancellor of the Exchequer George Osborne speaks at the CBI Annual Dinner, in London used to signal policy shifts to the public and foreign governments.

Read more about the Pound in the GBP/USD forecast.

In Australia, RBA Assistant Governor (Economics) Dr. Malcolm Edey speaks at the Australian Retail Deposits Conference, in Sydney. Will affect the Euro currency and provide clues for future monetary policy.

More in Australia, Westpac Consumer Sentiment is expected to remain around -0.1% as in the previous month.

Later in Australia, Wage Price Index is expected to move up from 0.6% to 0.9% which is bound to affect inflation rates.

For more on the Aussie, read the AUD/USD forecast.

In Japan, Prelim GDP measuring the change in the inflation-adjusted value of all goods and services produced by the economy is expected to rise from 0.9% to 1.4% indicating a healthy market activity while the Prelim GDP Price Index measuring the change in the price of all goods and services included in GDP is about to decrease from -2.8% to -2.9% indicating low inflation rates.

More in Japan, Revised Industrial Production is expected to rise from 0.3% to 0.4%,

That’s it for today. Happy forex trading!

Want to see what other traders are doing in real accounts? Check out Currensee. It's free.

Forex Daily Outlook – May 18 2010

Posted: 18 May 2010 08:31 AM PDT

US PPI is expected to drop lowering inflation rates, Housing Starts on the rise and Federal Reserve Bank of Clevel, President Sandra Pianalto delivers a speech at the Economic Club, in Pittsburgh and Foreign investors increase their purchases in Canada. With this we open today’s report.

In the US, Producer Price Index for Finished Goods is foreseen a decrease from 0.7% in April to 0.1% indicating low inflation rates while Core PPI excluding food and energy is expected to rise from 0.1% in April to 0.2% this month.

Later the US, The number of new building projects authorized for construction is expected to drop from 0.69M to 0.68M.

Also in the US, Housing Starts are expected to edge up to 0.66M 30,000 more than in the previous month showing activity in the housing industry

Finally in the US, Federal Reserve Bank of Cleveland President Sandra Pianalto delivers a speech titled “Forecasting in Uncertain Times” at the Economic Club, in Pittsburgh. Should affect key interest rates and may provide information regarding future monetary policy.

In Canada, Foreign Securities Purchases measuring the total value of domestic stocks, bonds, and money-market assets purchased by foreigners during the reported month is expected to increase by 620,000,000 compared to April’s 6.72B due to the strong loonie and the market activity.

For more on USD/CAD, read the Canadian dollar forecast.

In Europe, German ZEW Economic Sentiment is expected to drop by 5.8 points compared to 53.0 in April may reflect on future economic activity.

Also in Europe, Deutsche Bundesbank President Axel Weber speaks about G-20 efforts to reform the global financial system, in Berlin Should affect key interest rates and may provide information regarding future monetary policy.

More in Europe, French Prelim Non-Farm Payrolls, released quarterly, are expected an increase of 0.1% after the decrease of -0.1% in April showing a hopeful recovery of the market and Italian’s Trade Balance reduces the deficit by 0.36B compared to April’s -2.33B.

Later in Europe, Consumer Price Index measuring the change in the price of goods and services purchased by consumers is expected to remain 1.5%, while the Core CPI excluding food, energy, alcohol, and tobacco is expected to rise from 0.1% to 0.9% though.

Later in Europe, Trade Balance is showing a drop of 0.1B from 1.8B in April.

For more on the Euro, read the EUR/USD forecast and Casey Stubbs' latest analysis.

In Great Britain, Consumer Price Index is released indicating an expected climb of 0.1% from 3.4% in April indicating inflation and rising interest rates while the core Consumer Price Index excluding the volatile food, energy, alcohol, and tobacco items; is expected drop of 0.1% from 3.0% in April.

Finally in Britain, Retail Price Index is also shows a rise in inflation rates by adding 0.4% from 4.4% in April.

Read more about the Pound in the GBP/USD forecast.

In Australia, Monetary Policy Meeting Minutes is released providing insight into the economic conditions which affect interest rates change.

In New Zealand, RBNZ Financial Stability Report is issued and will affect interest rates.

For more on the Aussie, read the AUD/USD forecast.

In Japan, Household Confidence is expected to rise by 1.3 points showing a careful optimism in the market.

That’s it for today. Happy forex trading!

Want to see what other traders are doing in real accounts? Check out Currensee. It's free.

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