Trading Strategy During the Central Bank Intervention
rom time to time, the central bank (CB) within a particular country, alone or with the support of the CBs of other countries, launches currency interventions into the market by buying up the weakening currency, in an attempt to artificially keep its rate stable. Bank of Japan (BoJ) is especially notable for such actions. It makes sudden and large- scale purchases of currency packages, thus keeping the yen rate against the dollar, or vice versa. This depends on the end of the currency channel acceptable for the CB at which the current rate is located. These actions of the CB always cause strong, fast, and large amplitude movement that may result in dramatic consequences for traders, leading to complete loss of their trading account. If traders are not ready for such action, this movement may inflict irreparable damage on their accounts within a few
To lower the risk of the loss during a sudden intervention and to use interventions for their benefit, traders should know and always remember the traits of this phenomenon, which is not rare in the currency market.
The first trait of an intervention is the direction of its movement. An intervention is always undertaken in the direction opposite to the main current trend. This can be seen in daily and weekly charts of currency rate fluctuations. See Figure 17.1.
The second trait is the amplitude of the movement. One should re- member that an intervention is aimed at a significant correction of the pre- sent rates. This amplitude fluctuates from 300 to 600 pips, depending on the scale of the intervention and the number of its participants. During concerted interventions, when several CBs of different countries partici-
FIGURE 17.1 Every CB’s intervention usually provides a very good opportunity to make a proﬁtable trade with very little risk or even no risk at all. With a CB on your side, you can join its action and ride the market on its expense. Here you can see a chart that shows a huge day range caused by such an event.
pate in them, the amplitude is even greater. There are almost no cases in which the market returns to its pre-intervention levels during the same business day. It is also of great importance that, as a result of the interven- tion, even a minimum amplitude (300 to 350 pips) of the market rate fluc- tuation gives us an excellent opportunity to make a profitable transaction at almost no risk. See Figure 17.2.
The third trait, which is also favorable for the trader, is that rumors and information of a potential intervention appear on the market some time prior to real intervention. This helps the trader take necessary mea- sures and get ready for such events.
Based on these traits, the trader should use the following strategy and tactics for the possible coming intervention:
Using the information that the present price level is unacceptable for certain CBs, you come to the conclusion that the market has entered the zone where the possibility of an intervention is high. From this moment on, at the beginning of each trading day, you place the trailing stop-loss or- der to open a new position at the distance of 70 to 100 pips from the cur- rent market price. You should do so on the assumption that, if the movement is fast, then your stop-loss order will work automatically and
Trading Strategy During the Central Bank Intervention 143
300–3500 pips move
FIGURE 17.2 Trading strategy on concerted intervention.
much earlier than the market will make its minimum possible amplitude during the intervention.
Furthermore, watch the market behavior, because several different scenarios of the further development of the events are possible. If an in- tervention has not been launched but, for some reason, the market has turned back and is approaching your stop-loss order slowly, you should cancel your stop-loss order and transfer it farther, keeping the same dis- tance of 70 to 100 pips from the current price. Slow movement of the mar- ket (even in the same direction from which the possible intervention is to be launched) is unacceptable, because my trailing stop-loss order was placed only on the expectation of the following event. If the position is triggered in the absence of the event I expected, my trailing stop-loss or- der is probably not going to work efficiently.
If the market continues its movement in the main trend, then in every 30 to 40 pips from its movement, you should place your trailing stop-loss order at the level that is closer to the current market price. (Here, it is essential to know that you should always begin by placing a new stop-loss order; and, only after that, cancel the old one so as not to miss the beginning of the in- tervention) Let us assume that fast and amplitude movement did take place. It passed through your stop-loss order and opened a new position for you au- tomatically. Immediately after that, you should find the reason for this move- ment because it may be caused by reasons other than an intervention.
Sometimes such a movement may be caused by the market reaction to rumors that the CB, which is going to launch an intervention, is checking rates. This movement may also be the result of an extremely nervous mar- ket reaction to any other event, news or rumors. If an intervention has not been launched, you should square the open position that was taken, as soon as you find out that the surge of the market activity has not been caused by an intervention. You should do so, whether this position gives you a profit or a loss at the moment of its liquidation. If the information about the begin- ning of an intervention has been confirmed and by the moment you find out about it the market has passed less than 300 pips, you can strengthen the position. You can do it either at once or after the pullback of 50 to 70 pips from the maximum price level of the last movement.
When the market reaches the amplitude of movement of 300 to 400 pips as the consequence of the intervention, you can pocket the profit in full or partially. If the liquidation is partial, the trailing stop-loss order should be placed for the remaining part of the contract. You should place it not farther than the price level of the initial position, so that the prof- itable trade could not become its exact opposite.
Timely fixing of the profit should be done, as interventions are usually launched as extreme measures of correcting unfavorable market rates. In most cases, they are contrary to the objective circumstances of a funda- mental nature. That is why the correction effect of an intervention often proves to be unstable. A few days after the intervention, the market may come back to the initial pre-intervention levels. Here, new danger of the CB’s repeated actions might arise. You have to avoid the situation when a successfully opened position, which has been profitable from the very start, may become its extreme opposite. You have to avoid the loss of the greater part of the profit, as well. To attain this goal, you should fix your profit immediately after the market amplitude reaches 300 to 350 pips, or protect it by placing a trailing stop-loss order. Because most recent BoJ in- terventions were made just to prevent fast decline of the Japanese yen, the USD/JPY range is usually smaller than 300 to 350 pips; and you have to adjust your tactics accordingly, by having closer entry stops and taking quicker profits if you are not willing to take any chances.