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June 9, 2022

Why I Day Traded USDCHF

Michael J. Donoghue
Why I Day Traded USDCHF

Price action for USD pairs was fascinating today as the DXY reflected bearish momentum that saw a low of nearly 102.15 intraday. This selloff was stopped at approximately 8:30 a.m. Eastern Time when eager buyers sent it soaring, eventually over the 103.3 level. Several factors were at play here, including important European Central Bank news and expectations for new US CPI data tomorrow. I took this opportunity to trade USDCHF this morning; it went well, and I entered and exited the trade in under an hour. Below I explore my process, and why I day traded USDCHF.

Fundamental Analysis

In many ways, the fundamentals favor CHF: Q1 GDP growth in Switzerland was positive unlike for the US, unemployment is 1.5% lower than in the US, and year-over-year inflation is gradually climbing. However, the Swiss National Bank currently has its key interest rate at -0.75%, compared to the Federal Reserve’s 1%, which involved a 50 basis point rate hike. On top of this, both CHF and USD are historically safe haven assets, and USD has encountered recent bearish data and increased chances at volatility due to upcoming US CPI data (perhaps indirectly through today’s ECB announcements as well). Thus, I decided I felt comfortable enough to go long on USDCHF as a day trade, but not confident enough to sit in it for too long.

Technical Analysis

I felt that there were enough technical indications here to warrant a brief long position. On the 1-hour timeframe, the price moved rapidly outside the Keltner Channel walls, and met significant support in two places: the 0.972 zone and the trendline pictured. I interpreted this bearish candlestick as a hasty reaction to meeting resistance around 0.98 (a reaction that could be short lived in light of potential for USD volatility). Thus, I entered at the 0.973 level, and took profit just above the 0.978 level, since I was not confident it could break through 0.98 resistance.

Sentiment Analysis

Sentiment analysis also made me feel comfortable entering the position. According to A1 Trading’s EdgeFinder, recent COT data reveals 76% of institutional traders going long on USD, whereas just over 10% are going long on CHF. In contrast, less than 1/3 of retail traders are long on this pair. These are all incredibly bullish signs for USDCHF, making me feel confident in my purchase, especially as Switzerland grapples with neighboring eurozone issues and with today’s arguably banal ECB decision. However, given my aforementioned uncertainties about the pair’s fundamentals and mutual safe haven status, I still planned on an early exit.

Key Takeaways

  • It appeared that fundamentals may be more favorable for USDCHF bulls, which made me confident enough to enter a long position. However, I was too uncertain to hold onto it.
  • I utilized Keltner Channels, joint support levels, and a hunch about hasty reaction to resistance at 0.98 and USD volatility to help me decide when to enter my position.
  • Institutional and retail sentiment indicators weighed heavily in the favor of USDCHF bulls, which made me feel confident in entering my position for a brief period.
  • I took profit just above the 0.978 level since I was not confident that price action could actually break through 0.98 resistance.

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