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Play The Forex Fix - JPY And CHF Pairs Range Bound

Summary

Trade range bound pairs in Forex with limited risk as an alpha generating strategy.

Use the Forex fix to your advantage in your portfolio.

Trade with the central banks - not against them.

The Forex market is very unusual; it's the largest market in the world with the least amount of significant players (a handful of large banks and central banks control the Forex market).

We see everyday in the news more and more proof that the Forex market, to a large degree, is fixed. Just today, two traders from Rabobank have been convicted of rigging Libor rates:

Two British citizens face lengthy prison sentences in the US after being convicted of rigging Libor interest rates, in the first case of its kind to reach a courtroom across the Atlantic.

The two former traders at the Dutch bank Rabobank - Anthony Allen, Rabobank's former global head of liquidity and finance, and Anthony Conti, a former senior trader - both intend to appeal against the verdicts reached by a federal jury in Manhattan.

The US justice department said the verdicts showed that the authorities were determined to crack down on financial crime.

Instead of getting into the detail of how and why the Forex market is different, and that it's fixed; let's look at some charts of USDJPY and EURCHF.

USDJPY 1 Hour

EURCHF 1 Hour

As you can see from the above 2 pairs which are not connected or correlated, there are defined ranges and little direction. While USDJPY has a slight trend up and EURCHF has a slight trend down, they mostly are range bound.

Why is this? Both the BOJ and the SNB have intervened in the market to influence the Forex market, and in some cases have defined predetermined 'fix' levels where they want the currencies to be. They can do that, because they are the primary emission of the currency!

A simple range bound strategy - trade the ranges

If you have the ability to trade spot Forex, trading these ranges is simple. In the case of USDJPY, simply sell when there's a big move up and buy when there's a big move down. There are ways to use algorithms to execute this as well - simply program them to trade against the market - if USDJPY is going up - sell, and if USDJPY is going down, buy.

Of course, there are situations where they will break out of the range - which is why it is always prudent to use stop losses and other account protection methods. The ranges certainly will not last forever - but the point is to make money while they last!

Trading ranges with options

If available at your broker, trading these ranges with options is great, especially with options such as 'double no touch' which allows traders to bet that a pair will stay within a certain range.

For serious traders, sell a call above the range and sell a put below the range for the duration you believe the range will last (30 days, a reasonable time). Or in the reverse and in the money, buy a put above the range and buy a call below the range.

What this bet is really all about - the Forex Fix

Not only do the banks fix Forex market rates, the central banks openly manipulate the Forex market in many ways:

  • Most basically, setting the interest rates
  • Capital controls (such as the case with emerging markets)
  • Actual Forex market intervention

See a short timeline of central bank intervention from Reuters here.

What are the best range bound Forex pairs?

Simply open your platform and look hourly or daily charts. Currently any CHF pair should be the best, and the best CHF pair - EURCHF. Any pair which is connected to a central bank that openly intervenes in the market, is subject to such behavior. JPY is a little more volatile than CHF, as Japan has a real economy it needs to manage (no offense, Switzerland!).

Remember - Forex is a countertrend market. It always pays in Forex to bet against the trend. Forget "The trend is your friend" and start listening to "Home, home on the range."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.