Forex Hedging Strategy
The Forex hedging strategy is a well-known trading method within the financial markets.
Traders generally deploy this method to minimize the risk of severe price movement against an open position.
In order to achieve this within this strategy, we are going to work with correlated pairs like AUD/USD and NZD/USD or EUR/USD and GBP/USD.
We have a set of embedded technical indicators which will help us determine when price is either bullish or bearish.
Once price is set to go in a particular direction on the AUD/USD currency pair, we’ll recommend that traders take up an order in the opposite direction for the NZD/USD pair.
By so doing, our strategy is designed to eliminate the risk associated to sessions of heightened uncertainty in the forex market.
We’ll draw in on both market directions i.e. during a trending market, we’ll take both directions but terminate one to ride the gains.
In a range-bound market, we ride them both as the profits accumulate, closing a position when it seems to be reversing within a defined trading range.
MetaTrader 4 Indicators: Gann HiLo activator bars (Inputs Variable Modified; Lb=36, Colors Width Modified; #0=3, #1=3), Stochastic Oscillator (Parameters Modified; %K period=19, %D period=6, Slowing=9)
Preferred Time Frame(s): 1-Minute, 5-Minute, 15-Minute, 30-Minute, 1-Hour, 4-Hour, 1-Day, 1-Week, 1-Month
Recommended Trading Sessions: Any
Currency Pairs: Any pair
Buy Trade Example: AUD/USD (Australian Dollar / US Dollar), H1 Chart
Long Entry Rules
Initiate a buy entry if the following indicator or chart pattern gets put on display:
- If three blue bars of the Gann HiLo activator bars indicator form on the activity chart as seen on Fig. 1.0, price is said to be driven to the upside i.e. a trigger to buy the designated forex pair.
- If the light sea green and dotted red lines of the Stochastic Oscillator Metatrader 4 forex indicator break above the 50.00 horizontal level as shown on Fig. 1.0, the overall market sentiment is said to be bullish, thus a signal to buy the selected currency pair.
- If the conditions above are true, we can initiate a sell order simultaneously on the NZD/USD pair.
Stop Loss for Buy Entry: Place stop loss below medium-term support.
Exit Strategy/Take Profit for Buy Entry
Exit or take profit if the following rules or conditions takes precedence:
- If while a bullish trend is ongoing, the Gann HiLo activator bars indicator displays a red bar on the activity chart, bullish sentiment is said to be weaning, therefore an exit or take profit is duly advised.
- If the light sea green line of the Stochastic Oscillator dips below the 50.00 horizontal level while a bullish trend is running (see Fig. 1.0), it is a trigger to exit or take profit forthwith.
Sell Entry Rules
Enter a sell order if the following holds true:
- If three red bars of the Gann HiLo activator bars indicator get displayed on the activity chart as depicted on Fig. 1.1, price is said to be pressured lower i.e. a trigger to sell the currency pair of interest.
- If the light sea green and dotted red lines of the Stochastic Oscillator forex indicator dip below the 50.00 horizontal level as exemplified on Fig. 1.1, the general market sentiment is said to be bearish, thus a signal to sell the currency pair of focus.
- If the conditions above are true, we can trigger a buy order simultaneously on the NZD/USD pair.
Stop Loss for Sell Entry: Place stop loss above medium-term resistance.
Exit Strategy/Take Profit for Sell Entry
Exit or take profit if the following takes center stage:
- If the Gann HiLo activator bars indicator displays a blue bar on the activity during the course of a bearish trend, a bullish reversal is said to be looming, therefore an exit or take profit is duly recommended.
- If the light sea green line of the Stochastic Oscillator surges above the 50.00 horizontal level while a bearish trend is ongoing (refer to Fig. 1.1), it is a trigger to exit or take profit without delay.
Sell Trade Example: AUD/USD (Australian Dollar / US Dollar), H1 Chart
About The Forex Technical Indicators Used
The Gann HiLo activator bars custom indicator is drawn over the activity chart and is essentially a simple moving average of the last three periods highs or lows plotted in relation to the HiLo Activator.
The Stochastic Oscillator is a momentum oscillator that is attributed to George Lane.
The indicator is made up of two lines, the %K fast line and the %D slow line, while it oscillates between 1 and 100.
Basically, the Stochastic gauges the relationship between an assets closing price and its price range over a specified time period.
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