EUR/USD and EUR/GBP – Hedging the US Elections

Posted Wednesday, November 9, 2016 by
Skerdian Meta • 2 min read

Yesterday we opened a long term sell forex signal in EUR/USD, hoping that Clinton would win. All the polls placed her clearly ahead until around 3 AM Central European time, so this trade seemed pretty logical. We also opened another signal in USD/CHF, but we closed it this morning for a minimal profit after getting nervous from the initial 300 pip USD tumble.  

We all know what happened. Trump shocked everyone, some positively and others not so positively. The forex market went through a period of shock as well during the early morning, but forex traders quickly realized that the world isn´t going to end tomorrow and the USD found some buyers again.

EUR/USD has been moving in a 100 pip range in the last several hours with our open forex signal turning red (loss) and green (profit). Right now it sits comfortably in green with a 90 pip profit. A couple of hours ago, the price was near the opening level and it was very unclear whether this forex pair was about to shoot higher or dive lower, so we decided to open a short term EUR/GBP sell signal to hedge the EUR/USD signal.

You could argue why didn't we hedge it against GBP/USD, for example.

The answer is simple. You can´t hedge a forex pair, which is positively correlated, by taking the same direction. EUR/GBP was the best pair to hedge because if EUR/USD was to surge higher, EUR/GBP would move higher too because the Euro would benefit a lot more from any risk aversion/panic/shock move.

The market sentiment for the GBP, on the other hand, continues to be extremely bearish due to Brexit, despite the recent jump after the UK High Court ruling last week. So, if we were to lose a bag of pips from the EUR/USD signal, we would take back a handful of them from the EUR/GBP signal.

That would slash our losses in case the price went against us. That´s what we call hedging in forex. Luckily for us, this strategy went in our favor since EUR/USD has lost about 100 pips in the last couple of hours. Unfortunately, the EUR/GBP signal hit SL which was expected after the decline in the previous forex pair.

So, hedging the SU elections is working for us thus far, since we are about 40 pips in profit from the two forex signals combined. The problem now is whether to close the EUR/USD sell signal and take the pips home or let it run further for more gains. These are the forex dilemmas that we have to overcome.

By the way, we moved the stop loss to breakeven on that signal. We did this just to make sure we are safe in case the US traders wake up in a terrible mood after the nightmare some might have had last night. 

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