Hedging Your Unconscious All-In Currency Trade

by Gabriel Grammatidis

You are trading currencies. You might not have realized that but you are. I don’t mean that you necessarily have an FX account, actively trade pairs and watch pips. Actually, you may think of yourself as an equities or futures trader but you do, however, trade currencies. What do I mean? Your chosen or domestic currency has a relative value in the global marketplace and if it’s losing value against other currencies, you are long on a major position with a declining price. Have you ever gone all-in before? If you don’t hedge your currency somehow, you are all-in in your present currency. Paying attention to long-term currency trends and knowing how to make some longer term position trades can benefit your trading results greatly. But how do you do that?

Trading FX Systems – Fractally

You have probably heard the market belief that “prices are fractal in nature”. This means that the same principles, techniques and system rules can be applied to any timeframe – be that the 15-minute bars, daily bars or even the monthly chart. I have this belief and I show how it applies across all of the systems I teach in the upcoming FX workshop. In my experience, these systems are at least equally reliable on higher timeframes as they are on lower timeframes.

Below, you can see a monthly bar chart that refers to a long-term trade setup we found during the last Live FX workshop in October 2014 (see the related Rich Man’s Panic). System 1 (Busted Breakout) triggered the entry signal for a position in the GBPAUD pair on the monthly chart in mid-October of last year. Over the last 6 months, this trade has generated a nice profit so far of around 8% respectively or 1400 pips. The position has reached better than break-even in its R multiple and is still open running towards the target zone at 2.4.

Managing Your FX Exposure

Please be aware that whether you trade stocks or bonds, you always face Foreign exchange exposure. If you trade US stocks you are actually long the USD. By the same reasoning, the SNB unpeg left investors that owned Swiss stocks with an enormous benefit from the appreciation of the Swiss Franc alone. If you have been long Japanese stocks, you might have found nice gains in your stocks — until you consider how the Yen has devalued against the USD – which may have erased any gains in your equity positions.

For most people, currency moves and fluctuations just seem to happen outside of their awareness. Currency moves may even appear random to casual observers. Are long-term currency moves really random? I don’t believe so for one moment. Thinking about and acting on which currencies might appreciate or depreciate in the coming period will have a positive impact on the overall return for your portfolio. As well, you might want to seriously consider how to hedge longer-term positions that are exposed to a depreciating currency.

In this respect, have you ever thought about longer term trading currencies with your retirement account? Please note that Americans are actually able to trade FX within their IRA accounts or 401K accounts and many brokers allow you to do exactly this.

Higher Timeframe Trade Signals

Being fractal in nature, the FX market allows a number of systems (all of the ones I teach) to be applied in the very same way on higher timeframes than the timeframe for which the system was originally intended to work. Let’s look at several case studies for long-term FX entry signals of the GBPUSD pair generated by the Busted Breakout system in the daily and monthly charts. First, here’s a daily chart of the GBPUSD pair from mid-2013 – mid-2014 with two setups and entry signals:

Both signals occurred in a well-established uptrend and represented excellent trading opportunities for riding the trend over several weeks/months. Every new entry signal offers an opportunity to add size to an existing position which allows you to build a large, long-term position in a strong trending FX pair.

Now, let’s have a look at the current GBPUSD monthly bar chart in which you can see the upward trend from the chart above in perspective of a longer timeframe. The system works very similarly with monthly bars as is does with daily bars. In this case, however, the trend reversed late last year and as you can see below, the system generated a short entry signal late last year. The target for the pair is at par level which should be achieved within the next 12 to 18 months. This trade offers a potential gain of around 30% or 5,000 pips.

Suitable Instruments for Long-Term FX Positions

You might wonder about the best way to trade higher timeframes for FX. You might also have some concerns holding a position over a long period of time in a margined instrument such as a currency future or FX spot. As mentioned in an earlier article (see Practical Swissy Lessons) Forex traders have the benefit of being able to choose from a wide variety of FX instruments. For trading longer-term using daily, weekly or even monthly charts, I would recommend using standardized and liquid instruments namely currency ETFs (leveraged or unleveraged) or currency options. Please note: you cannot lose more than your invested capital on the options and no more than your capital plus equity margin for ETFs (note — retirement accounts typically do not provide margin). One advantage of trading currency options is that you can benefit from the increase in price and also from the expansion in volatility — which is typical for Busted Breakout system trades.

Remember, you already hold a large currency position whether you realized it or not. Learn to benefit from the trending currencies as they are likely to trend for the foreseeable future!

Good trading,

Gabriel Grammatidis