Wednesday, May 21, 2014

OmiCronFX is a true hedge fund | Fed discusses its exit strategy

The term “Hedge Fund” has evolved from a precise description of an investment strategy to a general term used to describe just about any kind of financial grouping that is formed for the purposed of investment.

OmiCronFX uses hedges as one of its measures to lock-in profits and reduce risk. Yesterday’s experience with the Aussie against the US dollar was a case in point. This trade was entered, to the short side, late last week. After initial inertia it started to behave, creating a very nice level of profitability. However, towards the end of the London session yesterday it reached a potential support in a technical sense and a small game changer in the fundamental sense. That is when we put on our hedge. This took the form of a new position, of half the size of the main one and going in the other direction, long. We moved the Stop Loss on the main trade to Break-Even at the same time.

Now we have, at worst, effectively locked in profit on half the position. But also, in the event that the Aussie is in a downtrend, as expected, and price starts to head south again later, we can close this hedge itself for a profit and let the original position continue on to its destiny. On the other hand, if the pair is not in a downtrend, we now have a counter trade that will carry us in the right direction.

We are lucky to have a broker that allows hedges such as this. We are also fortunate we are operating in a jurisdiction outside the United States. The regulatory authorities there, seemingly in the belief that hedges of this sort are too sophisticated for retail traders and could wind up costing them too much in commissions and spread costs, do not allow them.

Fed discusses its exit strategy

The small game changer mentioned above was the released minutes of the last meeting of the US Federal Reserve. The market apparently took them to mean that a rise in interest rates was pushed further out. 

The dollar will be back though, in our opinion. Considerable discussion centered on the manner in which interest rates would begin to rise after the ending of QE, and the best way to prepare the markets for this without causing turmoil. This shows an important shift in the psychology of the members of the Fed. They have now brought rate rises centre stage.

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