Learn Forex Trading Lesson 8: The Swiss Franc (CHF)

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SOME FACTS ABOUT SOME MAJOR CURRENCIES

In today’s newsletter, we will talk about some key characteristics of some of the currencies you will come across in the forex market. Understanding their behaviour will help a trader know when he should trade a particular currency. Have you ever opened you charts and seen one currency pair experiencing a great deal of volatility and another one at the same time just being docile? By the time we finish this lesson, you will have a better understanding as to why this is the case.

Swiss Franc (CHF)

I am mentioning this currency first because of the increasing role it is playing in the forex market, given the economic instability in many countries of the Eurozone and the US. The Swiss franc, also known as the Confoederatio Helvetica Franc or CHF, is the currency of Switzerland and Liechtenstein. The Swiss Franc is used as a reserve currency (or safe haven currency) by many political and economic entities around the world. This is because Switzerland has remained a stable market economy with low unemployment, and GDP per capita that is larger than other Western European economies. In addition, the banking secrecy regime operated by the Swiss government has made it attractive for international investors.

The CHF rises and falls against the U.S. dollar in line with the Euro. How do these facts affect you as a forex trader?

Take a good look at this chart of the EURCHF (Euro vs CHF)

Swiss Franc: A Safe Haven Currency

Swiss Franc: A Safe Haven Currency

The Euro lost over 3000 pips from December 2009 to December 2010. The reason is not far-fetched. There has been a lot of instability in the Euro in the last twelve months, and investors naturally bought more of the CHF as a safe-haven investment, causing the currency to gain.

As a forex trader, once you notice some instability in a particular zone such as the Eurozone, a SELL order on that currency against the CHF may well be the way to go. Gains are often maximized if the position is held on a long-term basis (such as six months to one year), but short term gains are also commonplace.

The CHF also behaves the same way against other major currencies such as the USD and JPY. If you can master this point alone, you can pull in a good number of pips from your trading. Entry and exit points need to be determined however, and subsequent newsletters will show you just how this is done.

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