Technical Trades Based on Fundamentals – EUR/CHF Strategy

Occasionally countries or regions take aggressive action in the currency markets to support or suppress a currency pair. A recent example is when the Bank of Japan intervention into the USD/JPY and other Yen related pairs.  Another example is currently occurring in the EUR/CHF, and it creates a rare and unique trading opportunity.

Swiss Bank Support

In 2011 the Swiss National Bank said it would use all the tools at its disposal to keep the EUR/CHF above 1.20. Initially traders were skeptical. As figure 1 shows, throughout 2012 traders tested the resolve of the Bank, and the pair traded in a tight range just above 1.20

Figure 1. EUR/CHF Weekly Chart

Throughout 2013 traders have begun to accept the new reality and are now trying to profit from it.

The Swiss Bank basically acts as a backstop against drops below 1.20, creating a natural stop-loss.  Traders have therefore begun to bid up the pair, in attempt to get long, and then sell when a pop higher in the price occurs.

Figure 2 shows what has been playing out in 2013.

Figure 2. EUR/CHF Trading Range – Daily Chart

Near the beginning of the year, there were much larger moves, as likely less traders were involved, and there was still some skepticism about strategy implementation.

Since the middle of 2013 the range has become more contained, yet opportunity is present.

Theoretical Strategy

Traders are providing support between 1.21 and 1.2250 and then selling between 1.24 and 1.25.

The range is narrowing though, as traders fight for smaller and profits. All the while, the buyers are moving further away from power-house support at 1.20 which is the key to this whole strategy.

If an entry can be made near 1.21 or even 1.22 the strategy can still highly profitable though. Traditional technical analysis strategies still apply, so the price is likely to break out of the triangle that it is trading in. While it may head lower to test 1.20 (and possible even drop below it briefly to stop lots of traders out), if support is still at 1.20 the false breakout lower is likely to trigger a surge back toward the 1.25+ levels seen earlier in the year.

Therefore risk can still be limited to about 100-200 pips, for a 300 to 400 pips profit depending on the entry and exit point.

Risk can also be kept much lower though just by placing a stop loss order below a recent swing low in price after the buy order is filled. The 1.20 region doesn’t have to be used as a stop loss. A target can also be placed anywhere that provides a decent reward:risk ratio of 1.5:1 or greater.

Basically, the pair can be traded as a ranging type forex pair, just with the added benefit that there is power-house support at 1.20 which the pair is unlikely to drop below for any length of time.

Warnings

The major issue of course is that 1.20 has not been tested for some time now, and while the Swiss Bank has said they would support the rate, there is no guarantee of their resolve or that they won’t adjust or abandon supporting the EUR/CHF. Also, since many traders have positions based on the “fact” that the 1.20 support level will hold, a drop below 1.20 could trigger a massive amount of stops, likely pushing the price lower, if only very briefly.

If trading this strategy via a forex broker, the trades may last several days to several weeks. Therefore, be aware of the rollover credit or debit for holding a long position in that pair with your broker. While some brokers will give you a credit, others won’t and therefore each day you hold the long position you’ll be debited interest. Trading binary options you likely don’t need to concern yourself with this, but will still need to pick a suitable entry point and expiry date for the trade.

The strategy is not without risks, but is a compelling and rare opportunity where fundamentals can be used to enhance a technical trading approach.