When you’re trading anything – whether it’s currency, shares or pork bellies – the idea of hedging is designed to reduce the risk of the transaction significantly by exposing yourself to both sides of the trade.
If the market goes up you profit on the upside and close the downside, and vice versa. One strategy for this kind of trading is hedging USD positions on more important news items, such as interest rate decisions and USD GDP figures.
Approximately half an hour before the news is about to break, take opposing long and short positions in USD pairings, with stops on both sides set at the hourly high and low, and take profits set at perhaps 2 to 3 times that level.
When the news is released, you close all positions and orders in the contrasting side of the trade and take the profits from the winning trade, which should on aggregate deliver a profit.
What You’re Looking For
Essentially, you’re looking out for upcoming news that is likely to seriously affect the markets.
That is, the major stuff – GDP numbers, interest rates, massive economic indicators.
How I Hedge the News
The more considerable the news item, the greater the effectiveness of this strategy. While you are naturally taking on the risk and the likely small loss on putting up a hedging position, this should be far outweighed by the winning position once you immediately close your inverse positions and orders.
Essentially, this technique means you can’t really lose, unless the market flat lines or becomes wildly volatile, turning back on itself after initial trend signals.
Which Trader Does This Suit
This kind of hedging strategy is most suited to traders who have good organisational and technical analysis skills.
Firstly, you need to be on the ball as far as learning what happens and when in the world of major economic announcements, and you need to be positioning trades ahead of time in anticipation of results.
Further to that, there is a need to be able to accurately analyse and interpret technical analysis data to spot trends when they’re starting to emerge, and the sooner you can identify and react to a trend, the better placed you’ll be to cut your losses on the inverse position.
Strengths and Weaknesses
The main strength of hedging the news is that you effectively hedge your bets in either direction to make the most of the market movement, whatever happens.
Whether the news turns out to be better than expected or worse, you’re already in place with a good vantage point for watching the market move to where it needs to be to accurately reflect the impact of the announcement.
One of the key weaknesses, however, is that the market may rally up before the news and then plummet when it has been announced, or vice versa. For that reason, you have to be quick off the mark, and act swiftly to position your trades and decide which side of the market is likely to work out better for you.
At the same time, you need to be conscious of closing out your inverse trade as soon as possible to ensure minimum disruption to your profits.