Hello currency traders! This week will explore a little about why a central bank can intervene in its currency, and how we can trade (or trade!) this development.
First, we must understand a little about Economics 101, in particular why a central bank may want a stronger currency and weaker. When I refer to Economics 101, it simply means that this is the theory behind why certain things are done in accordance with our core textbooks. As we all learned in real life, what is taught in school is not necessarily how things really work! The most basic is that you and I want a strong local currency, because when we go shopping in our local neighborhood superstore, car dealer or electronics store, imported products are cheaper in relation to our own currency. The more time strengthening our currency against another currency, in theory, the cheaper these imports should be. Central banks and the government wants a weaker currency helps local and export of our country that should help GDP, the trade deficit, employment and bring up domestic demand, thus increasing the revenue. While many central banks to be interviewed say they want a strong currency to make the suggestion that he is not manipulating its currency, what they say versus what they do is often different.
Here is a long-term weekly chart of USD / JPY.
As you can see clearly, the yen has been strengthening against the dollar for several years, in fact, more than double against the dollar going back to 1990! Does the Bank of Japan is happy with this? I doubt it.
From the blue arrows indicate the daily chart above, you can see clearly the result of intervention by the Bank of Japan September 15, where the USD / JPY rallied 300 pips around and stayed for about three days . Interventions second and third place less of a movement and not even one day! (While direct evidence for the interventions of second and third are more difficult to get interviews with several analysts and traders indicate that the Bank of Japan was behind these movements tend to short-term counter.)
So what we have is a downward trend evident in two letters to long-term, leading many operators to look for short positions. The trend is your friend right? But trading with the trend is only one thing to consider in our brands. When you enter a trade, we must also look for our two outlets – where our stop loss is and where it is a reasonable place to go for profit. In a downtrend, the overall profit target, goes where the pair bounced back before and stop-loss above the previous move or swing.
Looking at this figure of 120 minutes, the number of stop-loss orders were reached in these interventions JPY different? Hard to say, but I imagine thousands! So we have a bit of a dilemma. Knowing that want to trade with the long-term trend, but the central bank is trying to change the trend, what should we do as traders? We have several options. The first is that I would not change! I’ve had a couple of weeks out of the negotiations JPY pairs as more uncertain and volatile occasional peaks did not fit into my trading plan. Knowing that the market will always be stronger than any central bank intervention would lead to a stubborn businessman to keep short selling. However, keep your stop-loss success in these interventions could be a costly mistake!
The second option is to trade smaller position size. Taking an idea from George Soros and believe that the intervention of any central bank will only last a short time, they could still trade with the larger trend to learn that another operation may occur and make our stop-loss. With this possibility in mind, smaller trade position size makes sense so you can still be a longer-term trend, but also to reduce their losses if it stops being beaten. Always remember to sell in a supply and purchase in an area of demand, maximizing the risk to reward ratio.
A third option suggested to me by a student in the class was going to look for changes with the direction of the central bank’s desired currency. Logically, it makes sense to enter a trade where the central bank and “defend” a level – defended the price basically means that the central bank came in and started trading the currency pair. As the table above, you can see this technique worked very well.
Find out why a central bank wants to intervene in their currency is a factor in the trade, but knowing when they will do is the hard part. All we can do as marketers is to accept the fact that we have hit our stop-loss when this happens. As long as you still stick to the tendency for larger image and always have small losses that are inevitable in business, unexpected change interventions should not cause any undue stress.