Monday, 19 January 2015

The CHF and investment success

The 30% move in the Swiss Franc is a prime example of how you can apply a contrarian attitude to the markets for investment success.

Let's underline the contrarian idea further: your success in investment will have a strong correlation to avoiding the herd mentality; the advice of non-experts; and an ability to control your emotions. The recent activity in the Swiss Franc is a clear example of this.

If you follow the mainstream media, you would have had the opinion that the SNB would be able to hold the 1.20 peg for as long as they desired. To find an edge and succeed in the investment game, you must be able to craft your own ideas. Any advice or hunch that you receive must be tested with your own techniques before getting involved.

Once again, we can look at the futures positioning and see the relationship between commercials and speculators.

The chart is from USD/CHF but you can see clearly (highlighted in yellow) the activity of both groups. The commercial futures positions (blue line) were rising, signifying that they expected the CHF to gain in value. On the other hand, we have speculators (black line) reducing their exposure to longs on the CHF and going short. 

The weekly chart on the EUR/CHF also shows a clear downtrend in the pair and a probe of the 1,20 level. 

As price began to test the level, it was clear that there was no SNB buying to take the pair higher. At this stage we have speculators piling in expecting the central bank to make a move and give them a quick profit on their longs. Unfortunately for them, the SNB never appeared.

The Swiss Franc episode must be used as an example of trying to get an easy profit in the markets. The downside of playing with the peg is too risky to get involved - from both sides - so it is important to step aside, or at least find your analysis to gauge the risks.

Had you followed the media and made your decision on the non-experts in the financial media and their religious view of central banks, you would've been blown out. Now that the CHF has plunged, we will probably have a large number of speculators trying to pick the bottom for a quick gain, which will only create further losses. This type of kamikaze investing may work once or twice but will eventually finish you. Learn to play the trends, do your own analysis, and learn to anticipate these types of moves. Emotionally reacting to a market event is a risky strategy.

No comments:

Post a Comment