Technical Trades Based on Fundamentals – EURCHF Strategy

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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 2020 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 2020 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 2020 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 2020.

Figure 2. EUR/CHF Trading Range – Daily Chart

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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 2020 the range has become more contained, yet opportunity is present.

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.

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.

Developing A Trading Strategy Based on Fundamentals [Video]

When it comes to fundamental trading, major shifts in prices can often occur because of an unexpected news event or because expectations of news events are not met. Some forex-related news can affect the market as a whole while some will affect certain currencies in particular.

Economic data tends to be one of the most important catalysts for short-term movements in any market, but this is particularly true in the forex market, which responds to news from around the world. Typically, employment reports, interest rate decisions, and GDP numbers are what is considered important news for a country’s currency. These news are important because they can affect monetary decisions by central banks. If the data paints a picture of a strong economy for example, central banks will likely opt to raise interest rates which in turn typically causes their currency to rally.

Which News and Data Releases Impact the Forex Markets the Most?

Since the U.S. dollar is on the “other side” of 90% of all currency trades, U.S. economic releases tend to have the most pronounced impact on the market. It should be noted however, that trading the news is more complicated than it may first appear. Forex pairs can be affected by a number of different releases so predicting price direction is always speculative. Not only is the reported consensus figure important, but so are the forecasts and the revisions, other related releases and any major geopolitical developments that could also have an effect on the currency pair you are trading. That being said, news and data releases can provide some clues as to how the markets will behave but they should not be considered absolute.

Understanding Market Consensus

Market consensus is one of the most important concepts to understand when contemplating trading market news releases. Simply put, consensus refers to the average expectation of financial analysts and market participants for a particular economic report. As many analysts express their views, a general market consensus eventually forms, this is seen as the market “standard” against which the actual result will be measured. If the observed result is better than what analysts were expecting, related assets tend to edge higher in value. On the contrary, if the result turns out to be weaker than market consensus, then investors will be disappointed and prices will likely drop.

Using News Trading Tools

Perhaps one of the most important tools for a news trader is a well-rounded forex news calendar which includes all the currencies they intend to take their positions on. An economic calendar is used by investors to monitor market-moving events, such as economic indicators and monetary policy decisions. Investors will typically research the date and time of a specific event and pay close attention to the announcement because of the high probability that it will affect the direction of the market. You can find a detailed listing of all major future events along with their respective date, time, forecast, the underlying currency on BDSwiss’ Economic Calendar.

Knowing The Key Events

It is important to be able to understand the significance of each event and the level of impact it can have on certain currency pairs. The most sensitive releases that affect currency rates include the following:

Benchmark Interest Rate Decisions: Central bank rate decisions cause the most volatility in currency pairs, especially when a change in key interest rates was unexpected.

Inflation Data: The level of the price of goods in a nation can significantly affect central bank monetary policy.

Key Jobs Data – Unemployment rates and the amount of people receiving benefits for unemployment provides a barometer for a nation’s economic growth. U.S. Non-Farm Payrolls data in particular, is one of the most closely watched economic indicators and can have a substantial market impact.

Preliminary GDP Data – A country’s gross domestic product is one of the most important measures of an economy’s health and can also encourage monetary changes.

Trade Balance and Current Account Data – Variations in the balance between a country’s imports and exports has a substantial impact on a currency.

The Importance of Maintaining a Diversified Portfolio

Financial experts sing the praises of a diversified portfolio. But maintaining a diversified portfolio requires great discipline, especially when it comes to trading a number of different asset classes. Understanding these intermarket relationships is essential for traders who wish to maintain a diversified portfolio and mitigate risk. By following multiple markets, an investor gets the “bigger picture” and is able to recognise significant market and economic changes.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.8% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

The content of this material and/or any information provided by BDSwiss Holding PLC should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument and it is not intended to provide a sufficient basis on which to make investment decisions, in any manner whatsoever. Any information, views or opinions presented in this material have been obtained or derived from sources believed by BDSwiss Research Department to be reliable, but BDSwiss makes no representation as to their accuracy or completeness. BDSwiss Holding PLC accepts no liability for loss arising from the use of this data and information. The data and information contained therein are for background purposes only and do not purport to be full or complete.

Technical Trades: EUR/JPY, AUD/JPY, CAD/CHF

Traders are slowly getting bored with the coronavirus. In financial media, this topic is mentioned less frequently. This allowed a bullish correction on indices and a bearish one on safe heavens. Today, we will show you long-term situation on the three currency pairs, where we could spot interesting trading opportunities.

The first one is the EUR/JPY , where the recent pursuit of safe havens increased the appetite for the yen and triggered negative sentiment.

It all started with the bounce from the 122.8 and the upper line of the wedge. Wedge is a trend continuation pattern, so it was naturally promoting the breakout to the downside. It happened on the 24th of February and after that, the price created a small rectangle. This rectangle is promoting a further slide and this is our current outlook on this instrument.

A similar setup can be found in the AUD/JPY , where the price also bounced from the horizontal resistance and later broke the lower line of the correction pattern. In this case, it was a flag. What is different is the price movement after the breakout. On AUD/JPY the price dropped like a rock, without a pause like on the EUR/JPY . Well, Australian dollar is simply much weaker right now. Today, the price tries to initiate the correction but we are not convinced about the durability of this movement.

Last week was absolutely crucial for the CAD/CHF and you need to look on the weekly chart to understand why. After few weeks of a decline, the price eventually broke the lower line of the massive symmetric triangle pattern. In theory, that can start a new long-term down trend on this instrument. As long as we stay below the triangle, the sentiment remains negative.

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