From the December 2013 issue of Futures Magazine • Subscribe!

Correlated opportunities in the Swiss franc

Trading the move

The charts reflect the inverse relationship between the Swiss franc and the U.S. dollar. Clearly there is negative correlation here — a relationship that we would expect given the history of the Swiss franc and the fundamentals at work. The first step to taking advantage of this move is knowing it exists. Then you can prepare for it. Each day, watch the dollar at or around 10 a.m. and look for direction. Typically, prices start to settle down a half-hour after the 9:30 a.m. open of the day session. This move usually breaks soon after. 

Turn your attention to the greenback. When the dollar appears to be establishing a high or low near that time of day, look for opposite direction confirmation in the Swiss franc. For execution purposes, the Swiss franc offers the biggest bang for the buck with a 25% larger tick size. Among setup trades, this one is relatively safe and easy to spot, especially in the Swiss franc, which typically experiences extended moves when it does have a significant turn.

One method for getting into the market is to place a bracket order that will be executed in either direction at the time of the move. Consider a 10-tick stop and a 20-tick profit target. For most of these moves, you can expect a 20- to 30-tick advance in either direction. Be prepared to modify the profit target if necessary.

Don’t forget the stop loss, because anything can happen in a volatile currency market. A trailing stop is another layer of risk management. With a trailing stop, you enter with an initial stop loss then for each 10-tick move in your favor, the stop is advanced by 10 ticks. This way your paper profits are protected after a certain point. However, keep in mind that if you rely on the trailing stop to exit your trade that it, by definition, will get you out after a 10-tick retracement.

Market patterns don’t have to be powerful, and they don’t have to be substantial to make traders money. However, they do have to be reliable and identifiable. This simple movement in the Swiss franc and the dollar index can provide an ongoing profit opportunity for disciplined and attentive traders.

Nick Mastrandrea is the author of Market Tea Leaves. You can reach him at his web site www.markettealeaves.com.

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