A lesson on the importance of fundamental awareness for a technical trader

I paid a price last week in trading EURCHF for not knowing the fundamental analysis about the currency pair.  First of all, here’s how my trade played out.  The support between 1.500 and 1.510 is apparent if you look at Figure 1.  So I went long as shown in Figure 2 (second blue triangle from right) based on a positive divergence at a strong support of 1.510.  EURCHF stayed range bound for a over a day while my other positions were having roller coaster rides.  That’s when I decided to tighten up my stop on my EURCHF long from 1.508 to 1.5095 to limit my risk exposure.

As you can see in Figure 2, that was a bad decision.  On October 30, EURCHF made a swing downward to take out the nearby stops and then launched upward right past my target.  That would have been a quick and low risk play if I hadn’t micro-manged the trade and moved my stop up while the daily setup was still sound.

While getting stopped out is part of the game, as there is never absolute certainty in a trade.  But in this case, the probability of this up move was substantially greater than I would have guessed.  The extra bit of information lies outside of the chart.  It seems that there is a well known secret that the Swiss National Bank (SNB) has been intervening in the market to keep the Swiss Franc from being even more overvalued.  In particular, it’s well known that the SNB has their eyes on the 1.50 and 1.51 levels in the EURCHF pair.

SNB publicly announced their intention to intervene on March 12.  Immediately following the news, the EURCHF pair exploded up 470 pips in 20 minutes that day.  If you look at Figure 1, you can see that gigantic bar on March 12.  The DailyFX has an article on this monumental event.  Since then, the SNB has been coming to the rescue of EURCHF in very obvious ways as shown in Figure 1 with the regular spikes in prices.

Prior to this October 30 move, EURCHF had an identical price action exactly a month before on September 29, as shown in Figure 3.  Back then, EURCHF also had a positive divergence on a test of support at 1.5080.  Then next thing you know, the pair popped over a 100 pips.  Obviously, the SNB is trying hard to paint the tape on the monthly chart of EURCHF.

As I was saying, the SNB is intervening in the market to keep their currency from further over-valuation, which is hurting their local economy.  In both cases of Sept 29 and Oct 30, if the support was broken, EURCHF would have stepped into a grave on the chart.  Just look at that huge vacuum below 1.50 on Figure 1.

In this recent case on Oct 30, even though I did go long because of the chart, I didn’t have the edge of knowing this information.  Which led me missing this easy ride because I didn’t have as much conviction in this trade as I should have.

Coincidentally, as I have been aggravating to improve the win rates of my trades, this came hitting me right on the head.  So while I’m no economist, I should at least be aware of the fundamental forces at play in the currencies that I trade.  At the end of the day, technical analysis may provide guidelines to the mass psychology behind price actions, but it is the fundamental and economic forces that are ultimately driving the market.

EURCHF

EURCHF, 3-hour

EURCHF, 3-hour on Sept 30

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2. 4 fundamental entry signs for trading and why they are not that important
3. EURCHF breaking 1.5100: A textbook perfect breakdown and reversal
4. A technical analysis of 80 years of S&P500
5. Paper trade: Short GBPJPY @ 146.32, Target 143