The Intervention Lesson
On the morning of September 6th I thought my blurry, half closed eyes were seeing things when I sat down in front of my trading station. It said that I had a position that was at -633 pips of unrealized loss. A quick look at the charts confirmed the mother of all spikes.
A peek at some news sites confirmed what had happened: the Swiss National Bank (SNB), the central bank of Switzerland, had intervened in the market and set a peg of EUR/CHF no less than 1.2000. Since EUR/CHF had been idling just above 1.1000 before the intervention, it saw a rapid 1200 pip rise over a period of about 3 hours (with the last 1000 pips happening in the final 30 minutes). This move had repercussions in other Swissy currency pairs, one of which I trade: USD/CHF.
I had a resting sell limit order at 0.7916, just above the weeks’ high. I currently don’t place stop losses on my trades to begin with. Since I’m trading off the 4 hour charts I’m happy to give a newly opened trade a bit of breathing room initially before deciding what the maximum risk shall be. This is generally because I’ll be looking for the market to retrace and hit my limit orders. I’ll want to judge how the retrace is unfolding and when it looks likely that the trend has resumed before locking in the stop loss.
This practice obviously fails spectacularly when a central bank decides to intervene and moves the market relentlessly in one direction. This was compounded by the fact that I was sleeping when the intervention took place and my sell limit order was triggered in the mad move up in price. When I got to check on the trade after awaking USD/CHF was sitting somewhere around 0.8520 and I just got to see the dust settle.
In hindsight, the sunk cost fallacy grabbed me hard and wouldn’t let go on this trade. Did I want to just cut my loss and move on?
But I knew that the market loves to test a central bank’s resolve. It is inevitable that the market will test the SNB’s resolve to hold the 1.2000 level in EUR/CHF. The SNB can print unlimited amounts of currency to defend that level. Of course there will be domestic repercussions the more money it prints, so there is a limit somewhere. Right now I doubt anyone really knows. But the market will eventually attempt to find out. If the market’s going to test the SNB while not hold the trade and try and get out at a better price. It probably won’t get back to break even but a smaller loss is nothing to be sniffed at.
I don’t have a lot of experience with central bank interventions. I know the BOJ are the masters of interventions, but I only have limited knowledge of trading the yen pairs. I suspect if I did have more knowledge (which I have a bit more of now!) I would have known what the right thing to do was: do a stop and reverse.
There have been two interventions this year, the BOJ in March and now the SNB in September. The market will indeed test the central bank’s resolve. You only have to see where USD/JPY is today to believe that (i.e. it’s right back at the same level as when the BOJ intervened in March). It’s all just a question of timing.
In both cases the market went along with the central bank’s intentions: there was a continuation in the direction of the intervention. It lasted for three weeks after the BOJ intervention and we’ve had two and a half weeks of continued weakening of the Swiss Franc since September 6th.
I finally reached my uncle point in the aftermath of the FOMC decision this week. The official announcement of Operation Twist and the change in language to signal a significant negative outlook gave renewed emputise for US dollar bulls. This saw my USD/CHF position continue to take on water. With the pip loss now into four digits I decided that I’d been a fool to wait around for a change of direction for so loss. It was time to bite the bullet: I closed out the position for a loss of 1225 pips yesterday.
I had been putting on regular positions all the while: both long and short. When I closed out the big loser I had one other short that I closed at the same time. That’s why the pip value shown on my FXCM chart only show -734. That value is the average loss for each position. The other position was closed out for a loss of 243, for a total of 1468, and thus an average loss of 734 per position. I’m not sure why FXCM shows it this way.
Yes it sucks and I’m a bit annoyed with myself, but not too much. It only affected me negatively in one trade. On the flip side, the drive to US dollars benefited me very nicely in three other currency pairs that I had active trades on: EUR/USD, GBP/USD and AUD/USD.
In fact, later on the same day that I closed out the huge USD/CHF loss I also closed out two profitable AUD/USD legs for just over 1000 pips. I like to keep score on a currency pair basis, so I don’t see those Aussie profits as nullifying the Swiss loss in any way. To do that I will have to close out profitable trades in USD/CHF. But at least it keeps my account equity balance more in line.
The other reason why I’m not freaking out is that my return to trading the millipede way has been working out very nicely indeed so far. As I type, I currently have over 5700 pips of unrealized profit in 9 trades.




