For the past three years, the value of the Swiss Franc against the Euro had a limit imposed by the central bank, allowing for mean reversion strategies to be traded relatively predictably on the EUR/CHF market, where the Euro would be sold against CHF whenever it moved above 1.20 and bought when it returned to this level – a typical strategy employed in situations where the central bank enforces a certain fixed market level.
As of January 15th 2015, the Swiss National Bank has decided to remove the cap on the Swiss Franc, throwing a certain element of chaos into the market as long established strategies can no longer rely on this defining principle. We take a look at what this move means for traders and what algorithmic trading strategies can be adopted in order to cope with this change in policy.
SNB Decision to Remove Cap Prompts Change in the CHF Markets
After the SNB removed the fixed exchange rate the CHF increased sharply in value during the first few days. But of course this level was an exaggeration of the markets and it was to be expected that the CHF would level off after some time and reach a reasonable level. Many strategies went long EUR / short CHF just after the announcement. The CHF lost territory since then and is still falling slightly. The question most traders will be asking is, where will it level off, and when?
Adapt to the New CHF Market by Changing your Trading Strategy
For the past 3-4 years a mean reversion strategy on EUR/CHF and USD/CHF may have yielded relatively predictable gains. However, with the removal of the cap and subsequent change in market conditions, it is important to adapt your trading strategy accordingly, in order to trade effectively in the new environment.
Once the exchange rate has gained some form of equilibrium, you may find it more profitable to adopt momentum/breakout strategies that take advantage of the potential for heavy volatility in the current market.
“Algorithm is a Dancer”
Algorithmic trading software can help out in these unpredictable times as they not only do most of the legwork for you, but also offer sophisticated risk management and hedging features, preventing you from sustaining significant losses. AlgoTrader is an algorithmic trading platform that allows you to adopt complex trading strategies with ease, as well as automatically handling frequently used strategies such as momentum-breakout and mean reversion.
AlgoTrader offers a range of automation features and execution algorithms to help improve your trading profits and protect you from associated risks, catering specifically to hedge funds, proprietary traders and FX traders, so get in touch today if you would like any further details.
AlgoTrader CEO Andy Flury talks with FX AlgoNews
Following the move from the Swiss National Bank, FX AlgoNews got in touch with Andy Flury to talk trading strategies in early February. You can read the full article by clicking here.