Friday, December 18, 2009

EURCHF—is the SNB finally crying uncle?

I haven’t traded this pair much this year for the simple reason that the Swiss National Bank has been intervening to prop it up since March. Each time it has approached 1.50, "Bam!", as Emeril would say. The central bank jumped in to prevent the Swiss franc from appreciating too much.

Since October 2008, the pair has been coiling in a symmetrical triangle but there has been mostly sideways movement recently. Finally, though, probably in response to a rapidly weakening Euro, the pair broke through the horizontal support line from May and the triangle. Has the SNB finally cried uncle? Perhaps. After all, as the British central bank found out in the 80s, central banks can’t prop up a currency that’s aching to fall.

So how significant is this break? First, I don’t have a lot of confidence in moves that take place in the low liquidity days surrounding holidays. The pair did drop as low as 1.4579 in early March of this year before the SNB started its intervention so I’m not certain it has given up. If it does intervene, the pair will jump quickly. Let’s see, low liquidity that can cause exaggerated moves and the still present danger of intervention. Those two things shout to set tight stops if a trader goes short. Fortunately, with this pair, that’s not difficult since its average range of movement is small and it is still near the breakout point of 1.50.

Symmetrical triangles are often continuation patterns and the trend was down when the pair entered into this triangle. Bulkowski, in his Encyclopedia of Chart Patterns, says that there needs to be at least two distinct touches each of the two lines and that the entire pattern needs to last at least three weeks. This one qualifies on those counts. There also shouldn’t be a lot of white space and I’m concerned that there’s a bit too much here but there has been intervention (which tends to fog signals). If this is a valid pattern and it is breaking downward, the price projection is the width of the widest part of the triangle added to the breakout if the direction is up or subtracted from if the breakout is down. In this case, a downward breakout would result in potentially hundreds and hundreds of pips of profit. Before you start breaking out the deposit slips, it’s good to point out that he also describes patterns that fail—it breaks in one direction, then reverses and goes in the other direction. As I said, if you decide to short, keep stops tight. Here’s the daily chart:

Bulkowski’s can be found at Amazon: Encyclopedia of Chart Patterns (Wiley Trading)

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.

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