TRADING STRATEGY DURING THE CENTRAI BANK INTERVENTION

We talked in a previous article about Futures Fundamentals: Strategies

today we talk about :-

TRADING STRATEGY DURING THE CENTRAI BANK INTERVENTION

From 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

minutes.

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 present  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  

participate

TRADING STRATEGY DURING THE CENTRAI BANK INTERVENTION

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

 in them, the amplitude is even greater. There are almost no cases in which  the  market  returns  to  its  preintervention  levels  during  the  same business day. It is also of great importance that, as a result of the intervention, even a minimum amplitude (300 to 350 pips) of the market rate fluctuation gives us an excellent opportunity to make a profitable transaction at almost no risk.

 See 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 measures 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 CENTRAI BANK INTERVENTION

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.

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