There was a lot of noise in Forex circles about the new “hedging” rule passed by National Futures Association. NFA is a self regulatory body which covers most, if not all, US based Forex retail dealers. It will be no longer be possible to hold both long and short position in a currency pair at the same time in one account. This is called “hedging”, even though it has little to do with real limiting of risks.

Frankly, what this permitted Forex traders to do, was to freeze an existing position, rather than implement any meaningful risk control measure, which is a purpose of hedging. Not all Forex brokers allowed this function on their platforms, but those who did, advertised it as possibility to profit from moves both up and down at the same time. For example, in theory, one could have 1 long lot in say EUR-JPY and 1 short lot in EUR-JPY, close them independently and profit on both. Sounds like a sweet deal, you can’t loose, right?

Well, not really. Few years ago I traded with CMS Forex, dealer that offered this option. It sounded great, so I decided to use it. Plan was to open a longer term “core” position in a cross of interest, and then try to take advantage of shorter time price swings either way. My primary trade would not be effected as long as opposing positions were of the same size. For example, having a trade based on daily charts, I could try to take advantage of swings in opposite direction on, say, 1H charts. Another “good” thing about it was that no additional margin was needed.

It didn’t work that great for me. More and more frequently I found myself using the “hedging” option whenever trade was going against me, in hopes I can unload it at a profit sometimes “later” when market changed. Unfortunately, this simply led to  opening of additional new trades and paying the spread on them, without improving bottom line. This option made me forget when to acknowledge that I made a mistake, take my losses and move on. Even if used as I thought it made sense, counter-trading longer term positions, results were not good. Strangely enough, I had decent returns doing it in separate accounts ( trading longer term in one while shorter term in another account), without overlapping individual trades and creating confusion. Something I do to this day.

Have not used this option in 4-5 years now and will not cry after it. I think it was giving people a false sense of safety, and thus became misused. Another thing- there was a time limit on it. Initial position was frozen for a week, after which the second trade was closed by the platform at market price. There was additional cost in interest rates. While position size was offset, the interest charged on one side of the trade was always a little bigger than interest earned on the other side of hedge, creating a “cost of carry”. Even though it sounded good, there was little benefit to using the hedging function. In my opinion, very few people could use it to their advantage on regular basis. These days it is so easy to open a sub-account, that one can use them to off set existing position and getting around new rule in this way. Eliminating “hedging” option is not the end of the world, and not worth all the debates it created.

Canadian Dollar proves to be very, very resilient and just keeps getting stronger. I’ve been following EUR-CAD over last few days including the changing market post from yesterday. As a matter of fact I tested the waters, by going long without waiting for a breakout. Entry was at 1.5285.
 

It looked promising for a while, but by this morning the advance faltered. Also, there was no corroboration for CAD weakness from other pairs. Just the opposite. Decided to close the trade and return to waiting for an upside breakout. Current buy order is at 1.5338 with about 100 pips profit. I might have to adjust it again.  A trade suggested for CAD-JPY is cancelled.

Kiwi-Yen trading worked out a little better.  Good trade from yesterday was followed by a little better one, which produced 80 pips. I have one more sell order pending here, this one under the congestion zone, at 61.40. If it is filled, target will be 60.40 or 100 pips. At this moment, with Yen getting weaker all over the place, I don’t expect immediate resolution. However, things can change very fast, especially with JPY, so I leave this order as is.

Not all yen pairs appreciated at the same rate. Some made it all the way up to previous highs, while others lagged, NZD-JPY comes to mind. Another of JPY crosses which seems a little weaker is EUR-JPY. Advance here came to about 134.50 level, roughly half way between extremes of past swing. I’m going to hedge my bets a little bit here, by placing a buy order in Euro-Yen. Entry is chosen at 135.61 with 100 pips objective.  One could also try to buy it on a pull back  to 133.50 or so, but on these time frames I’m waiting for breakouts- upside here or down in Kiwi-Yen.

Mike K.