Trading Forex in Baskets to diversify trading risk for both, speculative trading or hedging Forex risk by Ron Schelling
Using Fibonacci ratios to manage your trades efficiently
by Sunil Mangwani
November 23, 10:00 GMT
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The chart below is the EUR/USD for those who need to hedge their EUR/USD risk.
The bottom pane indicate the percentage to hedge and this indicator did very well during the last months.
Remember that many companies got in trouble not hedging Forex risk at all.
Have a look on some other major currency pairs and their percentage to hedge on this link:
http://www.2hedge.com/mmfxhedge.html
Due to a holiday break I can only answer questions after March 28th.
I like to come back on earlier 3-Way Arbitrage possibilties to trade the present volatile markets with less risk compared to trade just a signal currency pair.
Earlier post about this subject are on: http://blogs.fxstreet.com/forexhedge/2009/02/05/arbitrage-2/
On Febr. 20th. the Balance indicator, at the bottom of the chart below, closed below the zero line indicating to sell EUR/CHF 1.4763 and buy both. EUR/USD at 1.2535 and USD/CHF at 1.1781 to bring back the three in a balanced position again.
Near last Fridays’s close the open position was still at EUR/USD 1.2830, USD/CHF 1.1555 and EUR/CHF at 1.4835 which is + 297 pips an EUR/USD, minus Swiss 226 pips on USD/CHF and minus 72 Swiss pips on EUR/CHF, or all together in USD near US Dollar pips 600 per 1 lot each on the above currency pairs.
Not much maybe, but still money and reduced risk.
What can we learn from this strategy ? Using three currencies, which are normally in balance with each other, will reduce risk, have higher cost and use more margin.
Due to a holiday break I can only answer questions after March 28th.
In earlier posts we compared the price of oil in different currencies, but the same of course is true with gold, silver and other commodities.
The impact of foreign exchange rates these days get less effect for a long term investments.
Another way of looking at commodities is their present price level, like below the oil ETF, USO, which represent oil futures.
The hedge indicator at the bottom tells us to keep at least 20 % long after a big and long down direction.
Today there was a very important article out which, I like to share with you:
http://seekingalpha.com/article/120550-oil-despite-decline-a-must-have-profit-play
Very interesting to have some oil, gold, food at present price levels as a long term investment while it’s becoming less imporant if it is in one currency or another.
Yesterday I wrote about silver in Euro’s:
http://blogs.fxstreet.com/forexhedge/2009/02/14/silver-in-euros/
but today I received a very interesting article which I like to share with you and it has very interestying charts as well: http://goldmoney.com/en/commentary.html
A slightly different story about silver.
For non-dollar traders the results are different in Euro’s compared to USD results.
Looking at the silver price, in this case silver ETF quoted in US Dollar we are more or less back at the levels of early 2007 with a top in the beginning of 2008.
The same was happening in the silver price in Euro’s, so not a big deal.
The charts below can be used for different purpose depending on your home currency.
The top chart we see the red line SLV in US Dollar and the blue line SLV corrected for the EUR/USD.
The middle pane is the EUR/USD.
The bottom pane we see the different between Silver in US Dollar and EURO.
As we see it’s also a good indication or 2e opinion what the EUR/USD is doing in real terms.
Of course silver has it’s own live but can be very interesting when currency markets are volatile.
There are many way’s to rank strength and weakness of the currecy pairs.
Below the ranking of the currecy ETF’s as we did in earlier posts.
Currency ETF’s traded on US exchanges are quoted in US Dollar, so different from trading spot markets.
In this ranking I am looking in the right column to the 3-month ROC, so we see the Yen 8% up and the Mexican Peso 11.3% down in the last 3-months.
The column with the colors are the weekly trends while the next column tells me how many days that trend is running plus the percentage change of the weekly trend.
Most currency traders however are trading the spot markets and like to have a quick view as well what is strong and what is weak on daily or intraday basis.
Of course there are many ways, but a simple way of doing this is by comparing the RSI of the major currencies and show them on top of each other.
The purple line at with RSI 64 is the USD/JPY and the green line 61 is the GBP/USD turning down.
At the bottom we see the EUR/GBP with a very weak RSI.
These are not trading signals but gives a first indication were the currencies are so you can do a next step in your analyses.
A very interesting chart below about US houshold debt (click on the chart).
Total debt is straight up (blue line) from 1945 and how about the growing interest payments (red line) !!
The FED will continue printing money to pay for all the stimulation packages and what is the impact for that on currencies ? Devaluation or do we have to buy more gold ?
I like to come back on the 3-Way Arbitrage I wrote last weekend:
http://blogs.fxstreet.com/forexhedge/2009/02/01/arbitrage/
Two days later on February 3th, the Balance indicator at the bottom on the chart below was coming back above the zero line indicating to buy the EUR/CHF and sell both EUR/USD and USD/CHF at the same time.
Today the balance indicator showing to sell the EUR/CHF and buy both EUR/USD and USD/CHF at the same time again.
The nett result is around $ 700 based on one lot each (100k.).
Not much profit, so is the risk, as they keep each other in balance more or less all the time.
Not a long story today but a very clear movie.
Think about for a moment what the impact will be for the USA Dollar, interest rates and inflation.
Most traders trading just one currency at the time and also intraday.
Another way to reduce risk is to try to take advantage when correlated currencies are not in balance.
We all know to trade the EUR/USD and USD/CHF in the same direction, so buy both or sell both, because one is quoted in USD while the other is quoted in CHF, so the diffence is EUR/CHF.
All three exchange rates, EUR/USD, USD/CHF and EUR/CHF are connected to each other, for example 1 EUR is 1.3000 USD = SFR 1.4800 (EUR/CHF) so the balance is zero.
Sometimes the three are not in balance like on the chart below with daily prices: top chart is EUR/USD, the 2e is USD/CHF and the 3e is EUR/CHF.
At the bottom of the chart you see that theoretical the balance must be zero, but in practise it is not and moving above or below one.
Try the following formula: EUR/USD x USD/CHF x (1/EUR/CHF).
The outcome is normally zero, but in realtime the bottom of the chart is realtime balance calculation moving above and below one.
In practise, when the Balance is below 1 you sell EUR/CHF and buy both EUR/USD and USD/CHF v.v.
