Trader's Perspective: Never Trust a Central Bank

Given the latest decision by the Swiss National Bank to eliminate the exchange rate limit of 1.20 Swiss francs to

Vlad

 

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Vlad Gubernat is a full-time trader based in Romania who shares his thoughts on his blog JLTrader.

 

Despite evidence last week from Swiss National Bank member Danthine saying the EUR/CHF floor at 1.20 will be maintained, the Swiss National Bank (SNB) released a market wide cataclysm by abolishing the minimum exchange rate and EUR/CHF floor.

Today’s shocking announcement of Swiss National Bank to discontinue its minimum exchange rate of 1.20 Swiss francs to the Euro effectively convulsed currency markets worldwide. Subsequently, the CHF appreciated some 30% against the EUR, falling well below parity, but for at least one hour you couldn’t see that on most retail platforms as the quotes and charts have simply frozen.

damage

Beyond proving once again in a big way that a ‘line in the sand’ in financial markets can’t last forever – the last event of such magnitude that I can recall is the Bank of England (BoE) and its unsuccessful defense of GBP exchange rate in 1992 – the SNB move reinforces a couple of trading lessons.

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1. Don’t trust easily

Never base your trading decisions on what Central Banks or any talking head on TV for that matter are saying. Assuming that they know what they are talking about, they can change their positions in a few hours or days – as shown at the beginning of this article- and by the time you find out about it, the damage has already been done.

2. Don’t Gamble all your investment

Never risk a big portion of your account on any trade – or in the words of the great trader Ed Seykota ‘keep bets small’. This way, even when the unexpected hits, you will be hurt but not terminated. Considering today’s example, even a 3% short CHF position – which many traders view as fairly conservative number – would have virtually wiped out the account. swiss-army-knife-152396_640

One protection that some people propose against cases like this would be to just keep enough money in your trading account to satisfy the margin requirements. I have mixed feelings about it, as it sounds more like gambling than professional trading. On the face of it, it’s true, you can’t lose what isn’t there.

On the other hand, it also seriously impedes your ability to trade. First of all, the debit/credit card deposits which are the fastest one, still take up to one business day to appear in your trading account. So even with the fastest deposit method, you might not have the money there when you need it. More importantly though, there’s normally a maximum $10.000 that one can deposit via debit/credit card in a calendar month and that forces one to remain forever in the little league of traders.

 

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