There are two ways you can trade forex and all other financial markets, you can buy or sell them. We usually call this ‘long or short’. Long means buy, and short means sell. If you follow our market updates and their analysis, you have certainly come across these two words very often. Often, instead of saying ‘buy or sell this’, let’s say we shorten EUR / USD or buy USD / JPY, for example.
So basically, when you open a store to buy (or in our case a signal to buy on forex), you’ve been going to that pair for a long time. For example, if you buy GBP / USD, it means that you went to the British pound for a long time and to the dollar for a short time. This is because if you buy GBP / USD and the price rises, which you hope will, it means that GBP is appreciating against USD, therefore, USD is depreciating.
A protection strategy is the safest way to trade if you use it the right way
One successful example of opening a long-term forex buy signal was in early May 2016, when USD / CAD made an impressive return after an epic two-year uptrend. The price has just touched 100 moving averages (MA) in green so we decided to opt for this pair for a long time. Well, we headed against CAD hoping to pull 300 pips out of it. As you can see, the price went up by about 700 pips, so we got what we went in for, as well as those who followed that forex signal.
We went to USD / CAD for a long time and the price touched 100 MA
One of the best examples of this is when we sold a short Forex pair when we were selling EUR / USD on the day. We didn’t think Brexit’s side would win, but since this pair was at the 1.14-15 level, which has been a strong level of resistance for more than a year, we believed that no matter the outcome of the referendum, prices would eventually go back down. We know that Brexit’s side won, and in addition to the GBP, the Euro also suffered. This triggered a profit in our short forex signal in Euros, giving us 280 pips of profit.
Some traders or hedge funds always look for financial instruments for a long time and never miss anything. Almost all the world’s central banks – and governments as well – have been involved in monetary policy easing programs for several years to stimulate the economy. Many traders believe this will continue for many years until the world economy fully stabilizes. Therefore, their trading strategy is always long, especially on stocks, because the more money is pumped into the economy, the higher the stock prices go. So far they have been right and have made quite a profit.
Other traders try to find the weak points of financial instruments or figure out a negative scenario in which things could go wrong and send one or more currencies and financial instruments down the water. In the movie “The Great Short Film” with Christian Bale, Brad Pitt and Steve Carell – some professional traders saw that in 2008 there was a big financial crisis, which lasted for a short time, which enriched them. George Soros was one of those merchants; sold GBP in 1992 and shortened AUD in 2004, resulting in profits in excess of $ 1 billion. Amazing trading.
But most traders go both ways in different financial instruments, or in our case, in forex pairs – we go both short and long. This is how protection strategies work. In fact, most financial investment institutions use this strategy, hence the name ‘hedge funds’. To use the header forex strategy correctly, you will find two positively correlated forex pairs (say AUD / USD and NZD / USD). If a forex analysis tells you that the U.S. dollar will rise, to minimize risk, you buy one pair and sell another.
For more information on protection: Hedging – Forex Trading Strategies
But which one should you buy and which one should you sell to make a profit, no matter which way the USD decides to go? Looking at both scales, over the last 10-12 weeks the USD / NZD has clearly created an upward trend with the growth of the housing market in New Zealand and the Royal Bank of New Zealand (RBNZ) giving up on rate cuts.
NZD / USD is higher than 12 weeks ago
Although AUD / USD has been trading sideways in the last 12 weeks, it is actually lower than 12 weeks ago. So you buy NZD / USD and sell AUD / USD. If things go well and the USD appreciates, AUD / USD would fall harder than NZD / USD. In that case, you would lose 500 pips in NZD / USD and win 1,000 pips in AUD / USD. If things go wrong and the USD falls, NZD / USD will surely go more than AUD / USD – in that case you would earn more from the long NZD / USD trade than you would lose in the AUD / USD short trade.
Man Group PLC is a London-based investment firm founded in 1783 by James Man as a sugar broker. In 2015, it declared revenue of 1.135 billion dollars. There are different branches of investment that use different investment techniques and trading strategies. Several affiliates use hedging as their main trading strategy.
They use this trading strategy on many financial instruments. The main financial instruments in which hedge funds are concentrated are stocks. Hedge fund analysts at Man Group try to find the fair value of the shares and then compare them to the real price. After that, they go for a long time on undervalued stocks, and on overvalued stocks. This strategy minimizes the risk that could arise from other factors such as market sentiment. If other market forces prevail, the two trades will end together. If not, then both trades will end up in profits.
To read more about market mood: Market mood trading – Forex trading strategies
But they don’t just use hedge strategies on stocks. They also use this strategy to trade in commodities, futures and forex or combined. In mid-January 2016, minority protection subsidiary Man Group lost $ 33 a barrel in oil and has long embarked on CAD sales of USD / CAD close to 1.47, as they have a positive correlation. They closed the USD / CAD trade at 1.25, which meant earnings of 2,200 pips while still sitting on their hands in the oil trade. If they close it immediately at $ 1.45 a barrel, they will earn 1,000 pips together, but they are still waiting to come out at a better price.
As you can see, hedging strategies are a very profitable Forex trading strategy that minimizes risk and exposure. This is the reason why many large trading companies use this trading strategy and that is why they are called hedge funds. Long-term forex and a short second forex pair that has positive correlations (as we explained in the example AUD / USD and NZD / USD) are likely to result in a small profit in the worst case scenario. If things go as expected, you will get big profits if you use protection strategies.