Forex Trading Strategy

USD/CHF Forex Trading Strategy: Swiss Franc Currency Pair (Backtest)

In the forex market, the USD/CHF pair, also known as the ‘Swissie’, is one of the most traded currency pairs. This is an accomplishment for such a small country like Switzerland. The currency pair is regarded as a measure of “economic health” between the U.S. and Switzerland – not to mention the global economy. The Swiss Franc is often regarded as a “safe haven” and tend to appreciate when there is financial turmoil.

In this article, we’ll explain the current state of the USD/CHF exchange rate and what impacts it. Additionally, you’ll find concise and actionable information with a backtested trading strategy. We’ll explore the key factors – like central bank decisions and economic data – that drive the USD/CHF market, providing you with the knowledge of the trading rules of a USD/CHF Forex Trading Strategy.

Table of contents:

Key Takeaways

  • The Swiss Franc’s (CHF) status as a safe-haven currency significantly influences the USD/CHF exchange rate, with appreciation during global economic uncertainty.
  • USD/CHF is sensitive to various factors, including economic indicators, geopolitical events, and the central bank policies of the US and Switzerland, making it crucial for traders to monitor these variables closely. That said, forex rates are hard to predict.
  • Interest rate differentials between the Federal Reserve and the Swiss National Bank affect USD/CHF, with carry trade strategies and central bank interventions playing key roles in exchange rate movements.
  • USD/CHF Forex Trading Strategy backtest and performance.

What is USD/CHF Forex trading?

USD-CHF Forex Trading

USD/CHF forex trading involves speculation on future rates between the two currencies. Engagement in the USD/CHF trading pair, also warmly termed “Swissie,” is one of the most important currency pairs within the foreign exchange (forex) market.

This currency pair reflects the number of Swiss francs required to buy one US dollar – a vital gauge for both traders and investors. Factors such as employment figures and GDP statistics from Switzerland and the United States, along with differences between interest rates set by the Federal Reserve and those established by the Swiss National Bank, make USD/CHF an energetic field for forex trading.

Owing to its status as a safe-haven asset that typically gains value during periods of worldwide economic turbulence, movements in exchange rates involving CHF against USD—which denote official currencies—serve as a pulse check on global economic moods. The constant fluctuations provide numerous opportunities for currency market participants to focus on this specific dollar-franc pairing.

What is a common USD/CHF trading strategy?

USD/CHF Forex Trading Strategy

A common USD/CHF trading strategy typically involves technical analysis, range trading, and a vigilant eye for significant breakouts beyond established resistance levels (forex traders frequently devise trading strategies that take advantage of the distinct qualities associated with the USD/CHF currency pair).

Given its relatively lower volatility when compared to other principal currency pairs, the Swiss Franc can impact both risk and potential gains for forex traders who favor short-term strategies such as day trading or scalping.

Most traders use anecdotal evidence and gut feeling, but we use quantified analysis. We form a hypothesis, make some trading rules, and backtest it to see how it has performed in the past. We are no fans of technical analysis or scalping unless it’s tested in some scientific way.

Considering the Swiss Franc’s status as a safe-haven currency, traders pay close attention to worldwide economic indicators and geopolitical developments. These factors can lead to heightened demand for the franc, which has a direct bearing on how they trade USD/CHF pair fluctuations in response.

Swiss Franc strategy – USDCHF Backtest

Before we backtest, remember that forex is perhaps the most difficult asset class to trade. Please read our article, which lists 12 reasons not to trade forex. This applies to the Swiss Franc as well.

The strategy we are going to backtest today is based on Bollinger bands, and it was backtested on the cash and spot prices—NOT the futures contract! A strategy based on the cash prices will most likely not work on the futures contract. Please keep that in mind!

If you are unsure what Bollinger Bands are, please read our article, which presents several Bollinger Bands trading strategies.

Because forex is a zero-sum game, we’ll make BOTH a long and short strategy.

Trading rules

The trading rules are straightforward:

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Here is the equity curve for the long strategy from the year 2000 until today:

Swiss Franc trading strategy
Swiss Franc trading strategy

The trading rules are “strict,” so there are not that many trades. We want to catch the big outliers.

Let’s look at how the short side of the trading strategy performed:

Swiss Franc trading strategy trading rules
Swiss Franc trading strategy trading rules

There were many more short trades, but they were not as successful as long ones. In fact, the short trades are not inspiring at all.

Please keep in mind that the Swiss Franc has been strong over the long run. That might be an issue for the short side, but we leave that to the more experienced forex traders to decide (we don’t trade forex).

If we combine both long and short, we get the following equity curve:

Swiss Franc trading strategy return and performance
Swiss Franc trading strategy return and performance

Here are the statistics and metrics performance for all three Swiss Franc trading strategies:

Swiss Franc trading strategy metrics and performance
Swiss Franc trading strategy metrics and performance

What is a Swiss Franc strategy?

A Swiss Franc strategy refers to your trading approach to making money from the spot price or trading future contracts. Your strategy will help you with market timing, use of leverage and position sizing, risk management, and trade management techniques. We believe a purely quantified approach is the best.

To succeed in trading the Swiss franc, you will need a robust trading strategy with precise entry and exit signals, preferably via backtesting.

How does the Swiss Franc affect USD/CHF?

Swiss Franc (CHF) Impact on USD-CHF

The Swiss Franc affects the USD/CHF in various ways, mainly through geopolitical events. These tend to be random and very hard to predict.

The Swiss Franc is renowned for its stability and significantly impacts the dynamics of the USD/CHF currency pair. As it is considered a safe haven currency, investors often flock to the Swiss Franc when economic turmoil arises, causing an appreciation that affects its exchange rate against the US dollar.

This was particularly evident during times like the 2008 financial crisis when there was a marked increase in demand for Swiss francs. These fluctuations serve as signals for those trading within this particular forex pair.

What factors influence USD/CHF exchange rate?

Swiss National Bank building in Switzerland

Factors influencing the USD/CHF exchange rate are (among others):

  • The Swiss National Bank’s monetary policies
  • Key economic metrics like Switzerland’s broadest measure of money supply (M3) and its Consumer Price Index
  • Interest rate decisions set forth by both the U.S. Federal Reserve and the SNB

Policy shifts and new expectations in the market can set forth a “cascade” of happenings in the financial market.

Due to a positive correlation among the Euro, Swiss Franc, and British Pound (most of the time), there is an inverse relationship between the USD/CHF pairing and other major pairs like EUR/USD and GBP/USD.

Why is USD/CHF considered a major currency pair?

Trading volume and economic importance

The USD/CHF currency pair is considered a major currency pair in the forex market because of the considerable economic weight and trading activity that both the Swiss franc and US dollar carry. The high demand for the Swiss Franc, rooted in Switzerland’s robust economy and sophisticated banking system, elevates its status as a safe-haven asset, particularly during periods when global economic uncertainty is on the rise.

Given its tendency to move inversely to other principal pairs such as EUR/USD and GBP/USD, USD/CHF stands in forex trading. This negative correlation offers traders various trading opportunities between the different currency pairs.

How does USD/CHF compare to other currency pairs?

The USD/CHF currency pair is distinguished by several characteristics:

  • The volatility associated with this pair tends to be less than that of pairs involving currencies from emerging markets.
  • There has been a historically consistent positive correlation with the US Dollar, indicating a reduced level of investment risk.
  • The Swiss Franc and the US Dollar are considered safe havens, often gaining strength when investors seek to avoid risk.

The peculiar dynamics between these two currencies make the USD/CHF currency pretty rare in currency markets. This provides traders with alternative trading strategies to make a diversified portfolio of trading strategies.

What role does the Swiss economy play in USD/CHF trading?

Swiss economy landscape

The Swiss economy plays an important role in USD/CHF trading. The Swiss Franc, which is Switzerland’s national currency, is heavily impacted by its sound financial indicators like M3 money supply and Gross Domestic Product (GDP), as well as by independent monetary policies implemented by the Swiss National Bank. Furthermore, Switzerland has many global companies considering its tiny size and population.

Due to Switzerland’s significant economic integration with Eurozone countries, notably Germany, there is often a parallel movement between the Swiss Franc and the Euro. This connection fosters a pronounced inverse correlation between two major currency pairs: USD/CHF and EUR/USD.

How do geopolitical events impact USD/CHF movements?

Global political developments substantially influence the USD/CHF exchange rate by altering confidence levels and the estimated future price of the currency pair. Due to its safe haven reputation, the Swiss Franc often appreciates during times of international turmoil or uncertainty as investors flock to the security offered by Switzerland’s currency.

Such surges in demand for the franc are reflected in changes to the exchange rate between USD and CHF, highlighting how susceptible this currency pair is to risk attitudes worldwide.

What are technical indicators for USD/CHF analysis?

Technical analysis tools for USD/CHF analysis might give traders and market participants a better understanding of trends and possible price shifts. Instruments such as Fibonacci retracements, Elliott Wave Analysis, and trend lines are frequently used to assess the momentum and trends. However, we believe you are better of quantifying trading rules.

Recognizing market correlations might inspire trading strategies focusing on this currency pair. For instance, there’s a persistent negative correlation between EUR/USD and USD/CHF that provides traders with comparative insights into different asset classes affecting their trade decisions.

How does interest rate differential affect USD/CHF?

The disparity in interest rates set by the Swiss National Bank and the US Federal Reserve greatly affects the USD/CHF rate, as it does for all currency pairs. It opens up possibilities for carry trade strategies, which occur when investors borrow Swiss francs at lower interest rates and then invest in US dollars to benefit from higher returns.

Such trading might increase the USD/CHF currency pair’s value because these carry trades capitalize on the differential between the US and Switzerland’s interest rates. Carry trades are pretty popular.

What are the risks associated with USD/CHF trading?

The risks associated with USD/CHF trading are as follows:

  • Unpredictable fluctuations in exchange rates
  • The impact of leverage on trade outcomes
  • Abrupt changes within the market environment
  • Market volatility, which can lead to erratic movements in price
  • Potential liquidity challenges that may hinder efficient trade execution
  • Geopolitical events leading to swift alterations in exchange rates
  • Inflation rate

Notably, due to its status as a safe-haven currency, the Swiss franc often experiences an abrupt surge in value during periods of economic uncertainty.

How do central bank policies affect USD/CHF rates?

Central bank policies affect the USD/CHD rate considerably – it’s probably one of the most important factors in determining the exchange rate.

When the Federal Reserve tweaks its federal funds rate, it affects the prime rate and how robustly valued the dollar is to other currencies. In parallel, actions taken by the Swiss National Bank to adjust interest rates or conduct open market operations can heavily impact both the liquidity and value of their national currency against that of America.

What historical trends can be observed in USD/CHF?

Historical trends observed in the USD/CHF rate are as followed:

  • Intense fluctuations in volatility
  • Persistent directional trends over extended periods
  • Responses to key economic milestones
  • Appreciable annual ascents
  • Marked reductions

If you want to craft a USD/CHF trading strategy successfully, we believe a quantified approach is best. So many factors influence the rate, and most are random, so you need to filter out the noise and make strategies based on specific trading rules.

How do traders hedge against USD/CHF volatility?

Traders hedge against USD/CHF volatility by employing several techniques:

  • By using options, they secure a safeguard against unfavorable shifts in currency rates.
  • Implementing stop-loss orders aids in curtailing possible losses (however, a stop loss seldom works).
  • Through diversification tactics, risks associated with trades involving USD/CHF are balanced by profits from other currency pairs.
  • Grasping how currencies correlate and applying correlation trading methods can counterbalance likely deficits in USD/CHF positions with positive outcomes from alternate currency pairs.

What are the advantages of trading USD/CHF?

The advantages of trading USD/CHF provide numerous benefits, such as:

  • Abundant liquidity
  • Distinct opportunities for trade amidst international economic turbulence owing to the Swiss Franc’s reputation as a safe haven
  • Chances for monetary gain stemming from differences in interest rates – carry trades
  • Prospects for hedging given its inverse relationship with the EUR/USD pairing
  • Indications of contrasting fiscal strategies across the respective economies

Because of the Swiss Franc’s association with gold pricing, shifts within gold markets frequently lead to corresponding fluctuations in CHF values. This linkage can present additional avenues for trading.

What are the disadvantages of trading USD/CHF?

The disadvantages of trading USD/CHF include that currency trading is a zero-sum game, it’s a crowded market place, random geopolitical events heavily influence forex trading, and you are competing against knowledgeable and capitalized traders.

How does USD/CHF correlation with other assets?

The USD/CHF has often correlates inversely against other assets, as this currency pair exhibits a negative correlation with the EUR/USD and GBP/USD pairs. This implies that usually, an increase in the value of EUR/USD or GBP/USD coincides with a decrease in the value of USD/CHF, and conversely.

Correlation analysis in trading can be a very useful tool in making trading rules and strategies.

What role does market sentiment play in USD/CHF trading?

The rate of USD/CHF is heavily influenced by market sentiment, which can significantly impact the demand for safe-haven currencies such as the Swiss Franc in periods of economic instability and fluctuations in the market.

Safe haven trading is all about market sentiment, and thus the USD/CHF is often used as a proxy for “risk on and off” indicators.

How do economic indicators impact USD/CHF movements?

Economic indicators chart

Economic indicators impact USD/CHF movements greatly. Economic indicators, including GDP growth rate, inflation rate, unemployment rate, consumer spending, and interest rates greatly influence market expectations and central bank policies.

When either the US or Switzerland exhibits robust economic health, their currency may appreciate in value. This appreciation directly affects the exchange rate between USD and CHF.

What are the key differences between USD and CHF economies?

The key differences between USD and CHF economies are, among else, that they differ significantly in terms of their scale and composition as well as the buying power of the Swiss Franc relative to the US Dollar. The stability and elevated quality of life within Switzerland’s economy also mark its distinct nature.

Pros and cons of trading the Swiss Franc?

The pros and cons of trading the Swiss Franc might be different from trader to trader, and engaging in trading with the Swiss Franc can present both opportunities and obstacles.

The CHF, a formidable currency backed by Switzerland’s stable economy, is attractive for those seeking safety from inflation and stability. On the other hand, managing monetary policy presents difficulties for the Swiss National Bank due to the elevated value of the Swiss Franc, which could potentially cause economic distortions.

When the CHF is strong, it may incentivize Swiss residents to spend their money overseas rather than domestically. This inclination could negatively impact local retail sales and thus have broader implications for Switzerland’s economy.

What are USD/CHF trading hours?

The USD/CHF trading hours is 24 hours a day due to the worldwide scope of forex markets. Optimal trading periods usually coincide with the overlapping European and American market sessions when both liquidity and market activity are at their highest. The UK’s 8:00 AM to 5:00 PM GMT time frame experiences an upsurge in trade volume, providing ample chances for investors to trade.

Traders often separate the trading hours into different sessions, for example, Asian sessions, and Europen sessions. Typically, each session has different volume, and might also have different trading patterns than can be exploited.

Is there an ETF for USD/CHF?

There is an ETF for USD/CHF, the Invesco CurrencyShares Swiss Franc Trust (FXF), and the exchange-traded fund is designed to mirror the fluctuations of the Swiss franc in relation to the US dollar. This allows investors to conveniently participate in Swiss currency movements without necessitating a forex brokerage account. However, the expense ratio is a bit high at 0.40% annually.

The annual returns for this ETF have displayed variations over time, indicative of changes in how much one could trade one CHF for USD or vice versa – the comparative value between these two currencies has indeed fluctuated through different periods.

What is the history of USD/CHF?

The history of USD/CHF has been a reflection of the global economy’s shifting tides, experiencing substantial annual ups and downs. This was particularly evident when the Swiss National Bank took the momentous step to unpeg the value of the Swiss Franc from that of the Euro in 2015, causing unprecedented turmoil if the exchange rate.

What factors are influencing the USD/CHF?

A variety of factors influence the exchange rate between the USD and CHF, including but not limited to:

  • Critical economic indicators like jobs data and gross domestic product (GDP) figures
  • The disparity in interest rates
  • The status of the Swiss Franc as a safe haven asset
  • The corporate tax framework within Switzerland
  • Switzerland’s substantial financial relationship with the United States as a major creditor possessing billions in U.S. treasury securities

How do you trade USD/CHF?

You trade USD/CHF by makign a hypothesis, make trading rules, backtest it, run it in a demo account for a long time, and then trade it. You can trade the spot price, trade ETFs, trade futures, or CFDs.

Trading forex normally involves leverage. But leverage bites when it goes wrong, so you must be VERY careful when using leverage.

How do you incorporate carry trade strategies into USD/CHF trading?

You incorporate carry trade strategies into USD/CHF trading by, for example, borrow Swiss Francs, which are typically associated with low or negative interest rates set by the Swiss National Bank, and invest in US dollars to benefit from higher Federal Reserve-set interest rates.

While this strategy is designed to profit from the rate differential, fluctuations in exchange rates and economic variations can ruin such a strategy in literally seconds by random geopolitical events. This is why forfex trading is so difficult.

Can you use options when trading USD/CHF?

Traders can certainly employ options when trading USD/CHF as a tool in their USD/CHF trading strategy, to hedge or speculate. Options grant traders the versatility to commit to buying or selling USD/CHF at an agreed-upon price ahead of time, providing a safeguard or hedge against unfavorable shifts in market conditions. Options are frequently used as an insurance, but for that you need to pay a premium.

What role does seasonality play in USD/CHF price action?

Historical seasonality patterns in USD/CHF include variations in price movements depending on the season, for example weekdays, months, or whatever stands out.

What are the most effective timeframes for USD/CHF?

The most effective time frames for USD/CHF depend on a trader’s specific trading approach. Those who focus on day trading gravitate towards brief intervals ranging from 5 minutes to an hour to seize quick fluctuations. Conversely, individuals who practice swing or position trading tend to favor daily or weekly charts for discerning trends that span from the medium to long term.

Scalpers within the market may choose even shorter periods such as 1-minute or 5-minute charts with the aim of exploiting minor shifts in price when it comes to USD/CHF pairs.

What are the most effective timezones for USD/CHF?

The most effective timezones for USD/CHF depend on your trading strategy, but the most volume occurs in the afternoon GMT when Americans get out of bed, and Europeans are still working and back from lunch. Trading the USD/CHF pair is most advantageous during the concurrent market hours of the London and New York sessions, as this is when liquidity and trading volume are highest.

This overlap creates ample opportunities for traders to participate in the market, particularly because it coincides with significant economic announcements that substantially impact currency price fluctuations.

Can you backtest the USD/CHF?

You can backtest the USD/CHF rate by using historical data based on the spot price, futures data from Chicago, or the ETF with the ticker code FXF.

Of course, backtesting reveals a strategy’s historical performance but does not guarantee its future success.

How do you minimize risk when trading the Swiss Franc?

Having a trading plan minimizes risk when trading the Swiss Franc. While it is no guarantee against adverse and random geopolitical news, we believe it’s your best hedge. Also, you need to trade small; any trading strategy should be no more than 2% of your equity.

Leverage should also be small so as not create havoc if it goes against you.

What are the implications of negative interest rates on USD/CHF?

The implication of negative interest rates on USD/CHF is a potential depreciation of the currency experiencing lower rates impacting strategies like carry trade.

When CHF has negative interest rates, it could boost demand for USD and subsequently change the exchange rate of USD/CHF. Central bank policies and interventions designed to handle these negative interest rates may result in volatility within this currency pair, affecting both trading success and the valuation of each respective currency.

How does Gold affect the USD/CHF?

The price of gold affects the USD/CHF exchange rate because it is inversely correlated with the US dollar and is considered a safe-haven asset. As gold prices increase, this often results in a stronger Swiss Franc, which positively correlates with gold. Such strength in the Franc typically leads to lower values in the USD/CHF pairing.

Because of this, you might make trading strategies based on strong and weak correlations between Swiss Franc and the gold price.

Switzerland’s requirement to import significant quantities of gold ties its economy and currency value closely to how well gold performs. This relationship between Switzerland’s economic activities related to gold imports exerts influence over fluctuations observed in the exchange rate between USD and CHF.

What impact do Swiss Franc’s safe-haven qualities have on USD/CHF?

The Swiss Franc’s safe-haven attributes have a considerable impact on the dynamics of the USD/CHF exchange rate. When global financial stability wavers, demand for the Swiss Franc tends to upswing, which usually results in its value going up compared to that of the US Dollar, consequently bringing down the exchange rate of USD/CHF.

Such trends indicate Switzerland’s steady political and economic environment that strengthens investor trust and shapes movements within USD/CHF currency pair exchanges.

Summary

The Swissie’s status as a major currency pair offers traders high liquidity and diverse trading opportunities because it’s an “anomaly” and might offer complementary trading strategies. As always, you need to backtest to find trading strategies and not base your decisions on “gut feels”.

Frequently Asked Questions

Why Swiss franc is so strong?

The Swiss Franc is strong because of its reputation as a safe haven and prudent fiscal policies.

How strong is the US dollar in Switzerland?

Presently, at the prevailing exchange rate, a single US dollar is equivalent to 0.88 Swiss francs, indicating that the US dollar is relatively strong within Switzerland.

Is CHF better than USD?

CHF is better than USD during certain times, especially during geopolitical turmoil. The Swiss Franc might be a robust substitute for the US dollar. Regarded as a safe haven and exhibiting less volatility than the US dollar, it has even surpassed the USD’s performance in certain periods this year.

How does the Swiss Franc’s safe-haven status affect USD/CHF trading?

The Swiss Franc’s safe-haven status affects USD/CHF trading immensely due to its reputation as a safe haven. This inclination causes the Swiss currency to gain value relative to the US Dollar, leading to a downward movement in the USD/CHF exchange rate as traders look for security in Switzerland’s monetary system.

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