The Swiss franc is denoted by acronym CHF which stands for the not very often used Confoederatio Helvetica Franc. Swiss Franc is what people prefer to refer to it in their day today life. CHF happens to be the legal and certified currency of exchange belonging to Switzerland and Liechtenstein. The only remaining currency across Europe still named franc, even the Central Bank of Switzerland uses the currency.
The currency pair indicates to the interested party whether he/she is a seller or a buyer what is the total number of Swiss francs that he/she will require to be able to purchase one U.S. dollar. Suppose the USD/CHF pair is appearing at 1.50 it means that trader will be required to spend 1.5 Swiss francs to buy 1 U.S. dollar. Or on the contrary if trader wants to exchange dollar for Franc for every dollar he will receive 1.50 Francs.
The USD/CHF -a safe haven pair in business circles amongst traders is also in short called the ‘dollar-Swiss’. It is considered safe because it is stable, and is reflective of the neutral character of Switzerland. Besides `Dollar-Swiss’ trading USD/CHF currency pair is also referred to as trading the ‘Swissie’.
When a trader is talking about the USD/CHF pair, he is considering the United States Dollar which appears at the first place as the ‘base’ currency, and Swiss franc which appears later in the way the pair is officially denoted is considered the ‘counter’ or ‘quote’ currency. USD/CHF currency pair is nothing beyond a comparison of the worth of former currency vis-à-vis the latter one. And that’s the reason traders find it considerably simple to trade USD/CHF in any economic environment.
Switzerland is a strong, stable, and a progressive economy – and that’s the foremost reason why traders, various economies, economists, every one approves of the country as a safe zone. It continues to display its strength even during crises situations and traditionally low interest rates phase.
However this hardly goes to say that nothing can move this mountain like pair. The USD/CHF exchange rate and even volume of trading gets impacted when there is any political disturbance in Switzerland.
The USD/CHF is the fifth most traded currency in the Forex market. One of the newer surveys’ observations which were made public by (BIS) the Bank for International Settlements survey in their report claimed that the Dollar-Franc currency pair which accounts for four percent of the total amount actually happens to be the least liquid currency pair amongst major pairs that are being traded in the market. Which means it’s not really a cash rich pair. The USD/CHF is negatively correlated to the EURUSD.
Swiss Franc –Why Is This Currency Considered a Safe Haven?
For over a century CHF, i.e. the Swiss Franc is the legally circulating monetary unit of Swiss Confederation. It’s a safe haven currency used by markets worldwide.
Even though Franc’s buying and selling rotates round the 80 & 90 cents range, it comes with a limited purchasing power. The justification for this is that it is a reserve currency used by all economies of the world.
It’s also one of the most stable units, which happens to be in sync with EUR. Just like EUR, the CHF also rises and falls against USD.
Besides US Dollar, and Japanese Yen, CHF is the third safe haven / reserve currency of the world. When traders are expecting markets to crash or take a hit as a result of some unfavourable news or turn of events at global level, their obvious choice is resorting to CHF.
The other unique feature that sets Swiss Economy apart from other developed economies of the world is the level of secrecy that they are legally bound to maintain. Banking institutions in Switzerland are not allowed to make information about Swiss account holders public.
CHF is reflection of many things – a strong economy, low inflation curve, low unemployment and so on. Not like the US and Japan, countries that are weighed down with high nationwide debt, and perpetual shortfalls in budget.
The scene with Switzerland’s economy is quite different. Their monetary policy has always been a conservative, and old school type. There is hardly any span for quantitative easing, asset-purchases etc. However the one thing that makes investors anxious and tense while trading the franc is that it has increased and gone up so much already.
Role of Swiss National Bank (SNB):
The Swiss National Bank (SNB) is supposed to be the critical variable when it comes to the Swiss Franc because of which it suffered a 20 Billion Franc loss. The reason for was hitting the bottom was considered to be intervention failure or things were not mediated in the right manner. This was during 2010.
They have learnt their lesson the hard way. Never the less as long as they’ve learnt it and something they are extremely careful not to repeat again considering the consequences and extent of loss they have suffered because of it.
SNB is not too keen to upgrade its interest rates, and it does not look like it will happen before March 2012 simply because the government does not want traders to explore CHF with speculative interest in mind.
However some experienced traders and economists do see value of Swiss Franc going up, which if happens, the SNB is not likely to intervene as the rise is going to prove beneficial for them in the long run.
If value of CHF improves or rises, it will help to keep inflation under control. When value of CHF is more it means they will have to pay less for imports, the merchandise and services that they buy from other countries will end up being cheaper for them.
It will impact their export adversely albeit. The exports will decline, because other countries will have to pay for merchandize they buy from Switzerland in Swiss currency, conversion of their home currency to Franc will cost them additional spending.
Then there is a set of people or investors who think that Franc may experience a slight low and in the course could correct a bit, because it has increased in value beyond what was expected and is within normal range. And the interesting angle here is that the Swiss economy has shown enough strength to take this appreciation in its stride and has maintained the balance extremely well. As a result of this traders are far from sceptical and place their unflinching support and trust in Franc.
Level of Experience Required For Trading USD/CHF:
For a while let us talk about traders’ profile keen to trade this pair, and successfully at that. For those who want to do trading with the USD/CHF pair will do well if they do not get into this specific arena without any or little experience. One is at least expected to have moderate experience fore they trade USD/CHF.
To be honest this currency pair is more suitable for advance currency traders than novices. And these are two most suitable trading styles for USD/CHF currency pair – day trading and Swing trading. Another precondition for trading this pair is that trader becomes well acquainted with, understands, and learns to apply Technical Analysis to his deals. Learning to fundamentally analyze the news that could be crucial from the CHF and USD point of view and also the respective economies they belong to – will also make trader’s observations and decisions sharp and accurate and will help him stay in the business and prosper long term.
USD/CHF pair has a tendency to lean adversely or negatively in terms of correlation against the EURUSD. Therefore if an investor forms a habit to compare EURUSD and USD/CHF charts before making any trading decision will help her/him to foresee future moves with more precision. Let us assume that the EURUSD breaks above a critical resistance level, and USD/CHF does not break support level until a particular time – in this kind of a condition it is a possibility that the USD/CHF will break below support level. This whole process curve does not go un-noticed from the eyes of an experienced trader, which also reiterates the fact that EURUSD is inclined to lead the move ahead of USD/CHF.
What Are The Primary Factors Affecting USD/CHF Currency Pair?
According to Bank for International Settlements (BIS) survey’s current report, USD/CHF pair makes for only four percent of total trading volume. This obviously makes it the least liquid major currency pair.
And yet it is considered a significant pair because of nature of their economies, and status of currencies of both these countries. USD/CHF currency pair is comparatively a more suitable pair for moderate to experienced traders than beginners, and works even better for those who are day trading and swing trading.
Currencies of both the countries, i.e. The US and Switzerland are considered to be safe haven or reserve currencies. Though both the counties are industrially developed, sound, and stable, nature of their economies is very different. Factors that make economies of two countries different are their systems of education, health, military, environment, government, taxation, language, and crime rate and so on.
Traders who trade this pair are familiar with this aspect and also consider it while evaluating and assessing the market sentiment a lot more precisely which finally helps them to striking winning deals.
US dollar has proved that it deserves to be a reserve currency by displaying its strength during the supposed dot com boom which finally resulted in major crises worldwide. That was the time when dollar, since it managed to retain its strength, it also managed to come close to becoming a global currency.
During the same phase developing countries were unable to secure dollar’s backing and financial support that they could use for exploring and investing in opportunities that could lead them on to the growth path.
Dollar, in the past few years has shown signs of a little weakening. And yet managed to retain its position and is counted amongst governing currencies in majority of international financial transactions & economies.
Coming to what effects rate of exchange or value of the USD/CHF pair, or factors that lead to fluctuations in the pair are those that affect either the value of the U.S. dollar or the value of Swiss franc- in relation to each other, independently, or vis-à-vis other currencies.
Because of the above reason, the degree of difference in interest rate between the Fed, & the Swiss National Bank affect the value of these two currencies when they are compared to each other. Fed is the short form for Federal Reserve and SNG is the short form for Swiss National Bank.
If suppose, the Fed decides to react or move in a certain direction in the open market activities to help the U.S. dollar strengthen, then the value of the USD/CHF will likely shoot up. The upsurge that the pair witnesses is result of strengthening of the U.S. dollar when compared to the Swiss franc.
The USD/CHF is negatively correlated with the EURUSD and GBP/USD currency pairs. Meaning the leaning of USD/CHF is not in favor of the two above mentioned currency. The reason is that the Euro, Swiss franc and the GBP – British pound share a positive correlation in relation to each other.
Understanding the USD/CHF Pair Inside Out:
Let us now understand USD/CHF pair thoroughly. Its value, exchange rate, what makes the pair break, shake, shape and so on. The value of the USD/CHF pair is quoted like this – 1 U.S. dollar per N number of Swiss francs. We shall understand it with the help of an example. Say the USD/CHF pair is trading at 1.50 – it means that it will take an investor, buyer, or trader 1.5 Swiss francs for him to be able to buy 1 U.S. dollar. Or vice versa – for every dollar that the investor sells or wishes to exchange for Franc in the market, he will receive 1.5 francs in exchange of selling or surrendering one dollar.
As already explained in the above lesson – the value of USD/CHF currency pair is affected by factors that influence the value of either the U.S. dollar and/or the Swiss franc in relation to each other and also against other currencies. Till here
Traders should also keep themselves informed regarding publication of Swiss GDP which could also prove to be a factor effecting USD/CHF critically. Gross Domestic Product (GDP) which is a quarterly index, helps to assess/evaluate the production and growth of the economy & is one the most reliable economic indicators, pointing at the health of US and Swiss economy.
Movement & instability continues to be on a high with this pair, however, USD/CHF traders like to play safe until they feel that the financial markets are not yet through with the re-balancing and de-leveraging process. During the phase when the risk sentiment begins to look sharp, CHF does rally, sometimes the dollar also shows signs of likely appreciation, provided the Swiss business firms bring an end to the rough and speculative positions with an aim of settling the debt. The most effective way to trade this pair is to identify and read the long-term scenario and follow it uninterrupted and consistently with a complete blueprint of plan of action at hand.
Another thing about USD/CHF currency pair is that it is not the first choice for scalpers. Also the pair follows regular trends in the market, and the overall dollar sentiment many a times plays an important role in determining the driving force pertaining to the USD/CHF market.
Markets have a tendency to watch over the trade surplus, and business sentiment statistics of Switzerland. However less importance is given to consumer surveys because of size of domestic economy, which happens to be pretty small.
For traders who want to learn more about USD/CHF trading or are new in the game should seek out suitable brokers in accordance with their style of trading, long and short term objective, and most importantly their level of experience – basic, intermediate, and advance if they have any.
Adapting To the USD/CHF Pair:
USD/CHF pair or Swissy as it is commonly referred to, is one of the major currency pairs that comes with the lowest cash-rich condition and movement. Lack of liquidity makes it less cash rich. Franc is unique and important and center of attention as it is the currency of the safe-haven tender and the country has no specific political direction. Over and above, Switzerland has some unique banking system privacy laws for safeguarding and protection of its economy’s interest. Explosive nature and liquidity of USD/CHF pair is in a certain way similar to GBPUSD.
Many traders who have been trading USD/CHF currency pair for a reasonable length of time and have got a good hang of it think that this pair resembles with GBP/USD as both have unpredictable nature, and their liquidity status also resembles. Like the GBPUSD, also known as Cable amid professionals and investors, USD/CHF is also receptive to false rumors, alarms and many a times it is observed that the pair moves extremely swiftly through support/resistance levels without much retracement – if at all, any.
There is a caution for traders who belong to the category that prefer to wait for retrace before entering trade. It is advised that traders trading USD/CHF currency pair should first sharpen their analytical skills which will prove to be of great help, when its time to take fast decisions, placing entry stop orders for breakouts etc.
What a trader is generally seen to do at such times is that he filters to seek breakouts with have more chances and thus ensures that his trades are based on longer time frame charts like hourly or daily and he won’t lean towards option that may encourage him to trade in shorter time frame.
The traders should also take note of the fact that the EUR/Franc has a tendency to become more cash convertible compared to USD/CHF or Swissie, and EUR/CHF is a favored pair amid traders who are trading at professional level or leaders who want to trade where one currency happens to be the Swiss Franc.
As a matter of fact the USD/CHF is one of those currency pairs that find its origin in EURUSD and EUR/CHF. When experienced traders trade Swissie, while trading they do take charts of both these pairs into consideration before they freeze on any important decision or simply to get a clear idea about the status of USD/CHF synthetic pair and the direction in which it is heading. As traders gain experience and insight into their specific market they will understand that Swissie is a crucial tool that points to dollar swings that are likely to make a difference if allowed to go unnoticed.
Unless some kind of news breaks out which is likely to lead to an expected hike in the interest rates within Switzerland, the Franc basically is seen to lean towards U.S. data rather than its home fiscal statistics. As far as the Franc’s safe-haven or stability status goes, the European Union is not done with pressurizing Switzerland to loosen up its privacy laws and give way to the opening up and coming out in the open with regards to its customers’ accounts. Once any such changes in banking conditions and policies on the part of the Swiss economy gets implemented, the situation is sure to impact the Franc.
For traders who focus their attention and strategies on intraday trading should take note that the USD/CHF is most movement prone during the European trading time frame that’s supposed to be at its peak active in the 0700-1700 Greenwich Mean Time frame, with a hundred pip range. This type of trading environment is highly suitable and recommended for traders who like to take risk, as higher movement and volatility in the market results in generating more entry points and better scope for booking profit.
Trading USD/CHF – Adaptation Is the answer:
Traders need to be patient and learn trading in their own time and at their own pace. The more thoroughly they gain the knowledge, the more their fundamentals will be place – the better insight they will develop. And this learning will help them to understand pair’s peculiar characteristic features, peculiar movements and reactions under different situations etc which will fine tune quality of their trading and reflect in the results. Knowledge will help them take better control of various market situations.
USD/CHF is a currency pair comprising US Dollar and Swiss Franc which when presented in this combination is read like this – price of one US dollar against Swiss Franc. Traders while trading this pair also have to remember the negative correlation the pair shares with EURUSD.
Franc owes its status of being considered a strong, stable, and reserve currency to the relationship that it shares with gold, which is considered a precious metal.
The US Dollar vs. the Swiss Franc is counted in the major pair’s category. This is a good pair to trade when one is trying to weigh the strength of the USD. The average daily range falls between 100-110 pips. Typical broker spread for USD/CHF is 2-4 pips. Trading sessions at its peak for traders dealing in this currency pair is the London session and New York session and the absolutely active and is at its peak between 7:30 GMT &17:30 GMT as mentioned earlier. Trading strategies to trade USD/CHF could be countless depending upon the trader, his style of trading, level of expertise, his budget, short and long term objective and so on. Traders are expected to have at least some experience before getting into real time trading with this pair. The value of one pip USD/CHF is variable.
Factors that influence trading environment for USD/CHF currency pair primarily concerns issues that impact US and Swiss market and as a result value of their currency changes (high-low). Besides this, since it’s a cross pair, it’s suggested that charts of pairs from where this pair originates are also considered.
Causes and Events Affecting USD & CHF Independently:
- Issues that are likely to impact Switzerland’s economic scene
- The Trade Balance Status
- Gross Domestic Product Index observations
- Reports of Consumer Price Index & observations
- Indicator -UBS Consumption The Adjusted Retail Sales output
- SNB 3 Month Target Libor Rate Releases & Observations
- SNB Quarterly, Monetary Policy Assessment that are likely to impact the currencies individually
- Statements Released by Economist on international or national forums can have a favorable or unfavorable impact on the pairs
Factors that affect USA and Dollars comprise:
- Non-Farm Payrolls Plus Unemployment Rate, Rate Decision FOMC, and Balance of Trade are foremost factors impacting US Economy and its official tender.
- Durable Goods Orders Placed along with placing Order for Purchases of Net Foreign Security play a role in US Economy
- Gross Domestic Product Releases and ISM Manufacturing debates may impact US market & currencies
- Level of Consumer Confidence, and Balance in Current Account can impact the economy
- Philadelphia Fed Survey observations, University of Michigan Consumer Sentiment Index, CPI, Consumer Price Index, Producers Price Index can also impacts US Economy and its currency
- and finally statements issued by Fed President, talks, speeches, statements and so on
Who Should Trade USD/CHF Currency Pair?
Irrespective of education and number of years’ experience that a trader might possess, it is absolutely impossible to devise a one size fits all solution or devising a winning formula for any currency pair that will work in all types of market conditions.
Market situations change by the minute and therefore it is impossible for an individual to claim that he has found a guaranteed winning principal or rule for trading currency pairs.
The most practical thing that a trader can do or advise others to do is to scan through the surveys carried out by central banks and financial authorities pertaining to major global regions. Though this information does seem to help to a great extent, it should however be remembered that these surveys don’t take activity on the retail or consumer level into account in which sense they do give out an incomplete picture.
There are in total eight currency pairs that are called major pairs which are supposed to be most traded worldwide. Each of these pairs come with some peculiar characteristics, which make it suitable for different traders depending on the category of trader they are or trading styles they prefer. So who should trade what is a decision that every trader will take for himself eitehr independently or under the guidance of an expereinced trader. These pairs are EURUSD, USDJPY, GBPUSD, AUDUSD, USD/CHF, USDCAD, EURJPY & EURGBP.
A trader focusing on short term trading is advised to concentrate on currency pairs that are traded in high volume because they are accepted as most active time frames where some value can be placed, and over and above these facts, these time frames and brackets also boast of the some of the most lucrative bid & ask spreads. So all you short term traders – its time to wake up and take your clue!But for a trader who is scalping or is into day trading it will do her/him a lot of good if they focus on the creamiest pairs for the location they trade in. This will take care of capturing and making the best use of the favorable trading conditions available in that arena.
Coming to investors who like to remain active in long-term swing trading and position trades are advised not to focus on again the most actively & highly traded currency pairs or where volume of trading is high.
Next we shall focus our attention on looking at trading from a different angle altogether. Here we shall break down currency pairs based on markets and pay attention in studying where USD/CHF pair trading will make most sense and prove to be most relevant.
Now we shall be discussing spot trading which can add considerably to the volume total trading.
Let us start with London as a centre to begin with. It is a trading center which boasts of most number of foreign exchanges in terms of quantity and volume of trading. As per current data released, USD/CHF finds a place amongst the most highly traded currency pairs in London market. So if you are a Londoner – trading USD/CHF should do you good. Try.
Next in line is the U.S (New York) Market which is second largest centers across the U.S for Forex trading. If you are a New Yorker USD/CHF again appears amongst the most traded currency pairs and you can give it a try. If you are trading in Japanese market then USD/CHF currency pair is certainly not the pair you should be looking at.
Australia – basically Sydney is known for generating significant Forex market share based on a total volume. If you are a trader based in Sydney USD/CHF being one of the most preferred and traded currency pairs here, you can also join the traders and try USD/CHF trading.
Coming to Singapore, though it can’t be compared to trading ceters such as New York or for the matter even London because of the trading volume, and yet it is considered a forex market with a wide field where major regional currencies of Asian origin get traded as a norm. And for those trading USD/CHF there is good news in store. USD/CHF is amongst high-volume traded currency pairs in this market and economy too.
USD/CHF – Timing Your Trade – Catching the Most Powerful Hours:
“Forex Market does not sleep, barring weekends albeit” is a phrase associated with Currency market and yet timing one’s trade happens to be such a critical issue for traders worldwide.
When a trader is able to identify the timing to strike profitable deals he is said to be a professionally trained and skilled investor. It adds a new dimension to his trdaing. Once he si through with `Timing-the-Trade’ lesson, the next stage for this him is to learn to trade in power hours. For this he first has to learn to identify power hours. This depends on the pairs and marekt he is trading in.
Power Hours trading is a hot & happening window to professional traders. It is a time period when both – volume of trading as well as fluctuations in the market are at its optimum. This volume – volatility combination results in wider pip moments. And this is where lies scope for booking profits. There are some traders who exclusively focus on power trading.
High volume of trading, as the phrase suggests, means a particular currency pair being bough and sold in a big number and high volatility is a result of fast movement & fluctuation in prices.
And when we associate the concept of Power Hour Trading vis-à-vis USD/CHF pair, the pwoer hours for this pair lasts for around four hours everyday. USD/CHF power trading can happen in the US-European overlap session. 8am to 12pm EST. This is the time when European session is coming to a close and American markets are opening.
USD/CHF traders, keen to strike it big during Power Hours if for some reason have not been able to trade during that time, the next best option is to trade when the trading volume is at at its highest in European or US market.
Keeping USD/CHF pair as a focal point – 2am to 12pm EST is a good time to trade this pair as European session is active at this time. Likewise, US session is full of life between 8am & 5pm for traders trading in USD/CHF.
The trading volumes and volatility, both are high during this time. Two major reasons behind this action packed Volume-Volatility session is; one that the transaction requires US dollar; and two, is that the stock and bond markets open at this time and traders convert their home currencies into dollars during this time. This significantly improves chances of booking profits.
Similarly there is a time period that USD/CHF traders should steer clear of, and that is the European-Asian overlap session which falls between 2am & 4am EST.
Taking Advantage of USD/CHF Currency Correlation
Currency correlation is a statistical or mathematical manifestation that displays the inter relationship between two or more currencies or currency pairs.
Understanding Currency Correlation Dynamics is of great importance for traders who trade more than one currency pair because it helps him to understand his holdings’ sensitivity to market volatility. The knowledge helps traders to hedge, expand, and improve profit margins.
Currencies are priced in pair format, and no single pair can trade 100% unaffected by others. Indirectly or directly, they are all dependent on each other. When trader is able to clearly understand these correlations and shifting trends, (how this change) he can take better control of his holdings.
Let us understand Correlation vis-à-vis USD/CHF pair. Currency correlation ranges between +1 & -1. When currency correlation shows as zero, it indicates that the relationship between the currency pairs is totally accidental.
Currency Correlation of +1 is indicative of the fact that the two pairs will move in the same direction & negative correlation i.e. -1 indicates that the pairs will never move in the same direction. Negatively correlated pairs will always move in opposite direction. Example of Positively Correlated Pairs is USD/CHF and USD/JPY. And example of negatively correlated pair is USD/CHF and EURUSD which has a coefficient that falls above -0.90 which can be considered as near perfect negative. And it means that the pairs will move in opposite direction almost 90% of the times.
It is better for traders to steer clear of trades which are eventually going to cancel each other out. Suppose, if the trader decides to go short on both pairs EURUSD and USD/CHF, it hardly makes any sense because both these pairs anyway are negatively correlated and the effect will invalidate the whole thing.
How Can Hedge Help USD/CHF Currency Pair?
Hedging is a method of trading, that helps trader to safeguard his capital by trading in a certain manner which will minimize his risks. When a trader is hedging – what he/she is actually doing is taking both sides of trade at the same time. In other words, Hedging is about taking financial positions on both sides of the market with an objective of counterbalancing positive or negative fluctuations in prices with each other.
Anybody can use Hedging – from a simple individual trader to a Corporation. It is better to enquire in advance with agent before taking an account with him/her if he allows Hedging.
Hedging can be done in many ways. Traders can get into hedging by way of simultaneous trading of one, two, three, and even four currency pairs.
If a trader decides to go long on the EUR\USD and then he goes short on the same pair it will nullify the effect. This is hedging with one pair. Coming to using hedging in two pairs – if trader decides to take long position on EURUSD and go short on USD/CHF that is showing a down trend the outcome will be different.
Hedging helps a trader to play safe with his money and strike a balance to some extent if market goes haywire at the lat moment. If trader decides to hedge with two pairs – takes long position with one and short with the other. Then if something goes wrong and he loses in a long deal then the short deal he took will cover that loss.
One thing to remember while hedging is that this technique may not give you big revenues in the end.
Hedging with three and four pairs calls for a slightly swifter and aggressive approach and needs a more experienced trader to take control of the three simultaneously trading pairs’ situation.
After going short on USD/CHF, the trader begins to sense that it is likely to cost him dearly because the pair is looking strong. So he starts checking out other pairs where one of the components is the US Dollar. In order to offset the risk he resorts to hedging and opts to go short on EURUSD, a pair which shares a negative correlation with USD/CHF.
In actual trading environment the USD shows signs of moving against CHF. USD by now has betrayed the resistance and the fallout is this new situation. And in this whole gamut, EURUSD stands a winner and USD/CHF ends up losing. Final result is – that finally, one pair has covered for the other.
A tool called the hedge calculator comes in handy at this point, as it helps the trader to identify and use various pip values to his advantage.
Coming to correlation between USD/CHF and EURUSD, there exists a negative correlation of –0.98. This means that 98 times out of hundred, when EUR/USD makes an upward move, USD/CHF pair is likely to experience a selloff. This equation holds true even for longer duration of time as the correlation statistics is supposed to remain moderately constant.
Let us try to understand why there exists such high level correlation between the EURUSD and USD/CHF pair. The pairs are correlated because in both pairs one of the components happens to be US Dollar.
This means that, say if for a fortnight, USA does well economically, then the value of EUR/USD will decline and value of USD/CHF will gain strength. This is not because causation exists between the two pairs; it is due to the fact that the United States has faired economically which has resulted in the two pairs correlating.
Majority of the correlations takes place at the time of breaking of some important fiscal news which could range from, change in interest rates, employment data, to productivity, and so on.
The above mentioned reasons give the market its volatility in the true sense of the word. If U.S. employment data comes out strong, there is a high probability that it will make USD stronger vis-à-vis all currency pairs whereever one of the components is USD.
We shall learn with the help of an example, as to how Hedging can reduce financial risk, and at the same time enable the assets involved to be able to generate profit from their investment. Let us say, a trader possesses a portfolio of one long EUR/USD lot, the lot comprising hundred thousand units, and along with EURUSD he also owns one long USD/CHF lot which too comprises a hundred thousand units.
Now let us assume that the value of EUR/USD goes up by 10 pips. This will result in increase in the value of holding by the trader by $100 on this point.
Now we know that EURUSD and USD/CHF are negatively correlated and have a tendency to move in opposite direction. As a result of this, the short USD/CHF position that the trader had initiated would start demonstrating in negative and it is likely that it begins to move below ten pips, bringing the value of this pair down to 83.00 US Dollars. The overall result of this balancing act will result in the net profit of $17.00 for the portfolio as a whole.
Trader has to keep in mind that he will stay in business as long as the price disparity and profiting from position gains is larger than the loss incurred due to losing position. For this simple thing for a trader to remember is that if both positions demonstrate BUY signal, he on a day to day basis goes on earning overnight interest.
As said earlier the hedge is not about making huge profits especially if there is a sudden change in the situation which calls for a strong EUR/USD sell-off. But the good thing is that even in the worst of situations the risk of losing is far lower when it is compared to trading EUR/CHF pair when it is traded independently.
If traders by virtue of their experience and knowledge of market are able to devise a Hedge calculator for themselves, it will prove to be very useful and come in handy for guiding them regarding number of lots they exactly need to buy of a particular pair to arrive at the closest hedge.
Ten handy Tips For USD/CHF Traders:
The Swiss Franc has been on an upswing against all its paired foreign exchange currencies with a recent rise that all safe haven currencies have experienced.
Trader or investor holding a long term position in the Swiss franc should ensure he maintains caution because though intervention has already been announced; yet when it is actually implemented, nobody knows the extent to which it will create risk.
Another big no-no for a professional currency trader is to ignore or take the trends casually which point to buying the CHF, however, there is a chance of trades turning against you and traders may find it difficult to deal with the situation as they may find themselves on the wrong side the trade. Following trading rules is something traders may find difficult, but that it is the only way to protect profits and perfect trading.
USD/CHF traders will get to witness long upward or downward trends many a times. This is why this pair is adapted to Swing Trading. Scalpers will not as such enjoy the run with this one because it lacks movement.
The CHF is a safe haven, and as strong and stable as gold. When economic crisis strikes, the Swiss Franc appreciates. Traders will note that the USD/CHF exchange rates are favorably and positively correlated to EUR/CHF. USD/CHF is 5th most highly traded and popular traded pairs. Both currencies belong to reserve currencies bracket, and the great contrast between the economies of the two major industrialized nations enables a trader dealing with this pair to weigh and measure the overall market sentiment a lot more accurately and efficiently.
The USD/CHF pair is cited in four decimal places. However with some brokers it is cited even in five decimal quotes. The pair follows floating rate of exchange, but again this depends on the law of supply & demand on the Interbank Forex market.
Unpredictable and volatile nature of this pair keeps trader constantly on the edge. During the period when market experiences a sharp risk sentiment, Swiss Currency generally tends to move, but on some occasions there is a likelihood of the dollar appreciating. This happens when Swiss economy demonstrates anxiety towards closing the speculative positions and settling its debt.
The best method to trade this pair is to identify a long-term scenario and stick to it consistently. This pair witnesses frequent long upward or downward trends which makes it a well adapted pair where Swing Trading is concerned.
However, USD/CHF is generally not the first choice for scalpers. The pair tends to follow the general trends in the market, and like mentioned earlier overall dollar sentiment plays an important role in determining the thrust of the USD/CHF market.
Markets watch the trade excess on one hand and keep an eye on business sentiment data released by Swiss authorities from time to time on the other. However since Swiss is a relatively smaller economy, it attaches less importance to consumer surveys. Whereas, if the US market is watched vis-à-vis statistics and data released in current conditions in the US, it can be noticed that the same is far more potent & causes major fluctuations in the price movement.
For long term success in Forex Trading, it is best that the trader identifies a pair or two as a beginner which he can easily manage and are less complex to understand. Once he starts understanding the business, gains exposure, and experience in the real market, he can accommodate a few more, and go on adding as he learns to take control. But for a beginner it is always advised that he plays safe and with the limited capital, he manages to gain unlimited knowldge, experience and exposure, which will keep him/her in business long term.