Hedging strategy for EU Referendum trade?

rom1

Trader
Mar 12, 2016
8
2
14
37
I have been reading a little about hedging strategies. One that seems to have received some criticism is the “buy/sell” strategy of going short on the same pair you are going long on (or vice versa).

I realise you would be paying double on the spread if you do this, but might it work as a hedging tool around a specific time when markets will drastically strengthen or weaken - like next week’s EU referendum next week (provided stop-losses are used)?

For example, I let’s say you go long and short on GBP/USD at the same time, and put stop losses on each sides of the trade.

I realise the increased volatility means stop losses on one (or even both) sides of the trade might get triggered prematurely, so let’s presume we don’t use very high leverage of 200:1 or more to prevent that from happening. Let’s say I use leverage of no more then 50:1.

Provided we believe GBP will either rally or drop significantly in value following the EU referendum vote on June 23rd (something I believe is a pretty sure-bet) surely one of those positions will go on to accrue profits while the other closes out when its stop loss is triggered.

Granted there may well be more than usual slippage in such volatile circumstances - but even if up to 100 pips is lost in slippage (which I would think is a lot even in such circumstances), I’d imagine the number of pips gained from the winning trade should be greater given the exceptional nature of the circumstances.

Now I’m fairly new to forex. I am still using a couple of demo accounts and was thinking of live trading a small sum of money for a couple of months as a next step – so please feel free to rip my little hedging strategy to shreds if it doesn’t make sense, or if I’ve missed something.

Given the extraordinary nature of events that are the UK’s EU referendum, I am tempted to make a larger than normal trade around the referendum, nothing too crazy, maybe something between £1000 - £2000 of my own money.

What do you guys think? Will any of you be trading the news in the run-up to, or after the referendum vote? If my thoughts on hedging could work, would they work with both a Market-Maker and ECN provider, or just ECN?

Thanks!
 
  • Like
Reactions: Enivid

radex78

Active Trader
Nov 15, 2015
671
17
34
42
I am reading new rules from certain broker on brexit, which these company will increasing margin requirement and spread 5 times than normal condition, many trader also said if about brtian exit will become high impact news to euro and gbp, use might use hedging will work but I am not use these strategy, still like fixed stop loss
 

rom1

Trader
Mar 12, 2016
8
2
14
37
thanks for the response. How can you get a fixed stop loss on a trade? Is that only with spread betting?
 

Enivid

Administrator
Staff member
Nov 30, 2008
14,152
633
144
Odessa
www.earnforex.com
In theory, what you propose is a good trading idea. In practice, it has a big risk of both stop-loss hitting with huge slippage each.

What also I find discouraging from taking such a trade is that the UK referendum is not an event with some particular release time. There is no set time for vote results report, and there will be a plenty of exit poll and preliminary results releases hitting the market at irregular intervals. I find that compared to today's FOMC decision, Brexit is rather difficult to "catch" with such a news trading strategy.

Anyway, if you decide to go for it, please use modest position size.
 

Ary Barroso

Active Trader
Jul 9, 2017
907
64
39
32
thanks for the response. How can you get a fixed stop loss on a trade? Is that only with spread betting?

As I see, fixed stop loss is not useful; because, we should concern on risk reward ratio rather than fixed stop loss.