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How To Invest In The Swiss Franc

The Swiss franc has long been considered one of the safe havens of the financial world. In times of trouble, investors could park their money in Switzerland’s national currency and know it would retain its value. The financial crisis of 2007-2008 sent nervous investors flocking to buy Swiss francs. Its rock steady performance in the ensuring European debt crisis made the franc even more popular. In this article, we will explore financial instruments, like ETFs and forex options, that allow investors to bet on the Swiss franc without actually buying up the currency.

When a Currency Is Too Strong

Back in 2020, the European debt crisis was roiling, the EU and international investors looking for safety bought up Swiss francs, driving up the currency’s value. The stronger Swiss francs started to hurt the country’s exports. At this time, policymakers in Switzerland decided to artificially cap their currency at 1.20 against the euro in an attempt to prevent the Swiss franc from becoming too strong. To maintain this cap, the Swiss central bank printed more francs and bought euros with them.

In an unanticipated move in January 2020, the Swiss National Bank suddenly freed its currency by removing the artificial cap it had placed on the Swiss franc against the euro a little over three years before. The move came as a shock for the forex market and send the value of the franc, a stable and conservative currency soaring. In the ensuing chaos, many traders and brokers experienced huge losses. Despite the unexpected decision and its fallout, investors still see the Swiss franc as a safe haven backed by a robust financial system and strong competitive economy. (Related reading Is The Swiss Franc A Safe Haven?)

Ways to Invest in the Swiss Franc

According to the Bank of International Settlements (BIS), the Swiss franc accounts for approximately 5 percent of global foreign exchange transactions. The U.S. dollar and Swiss franc pair (USD/CHF), known among traders as the Swissie, is the sixth-most-traded currency pair. Here are some ways investors can get exposure to the Swiss franc.

Exchange-Traded Funds (ETFs)

Launched in 2006, CurrencyShares Swiss Franc Trust (NYSE: FXF) tracks the price of Swiss franc against the U.S. dollar. Accessing the Swiss markets through an exchange-traded fund is a good option for those looking to take advantage of tactical opportunities in the short-term and strategic opportunities in the long-term without having to own a foreign exchange account. This route offers some advantages to investors. Investors can use their traditional brokerage accounts to buy shares of the ETF. These are treated as regular securities with transaction costs far lower than currency spot market transaction costs. The shares are traded on the NYSE Arca daily which provides eligibility for a margin account as well as short sale which is permitted by the U.S. Securities and Exchange Commission (SEC). (Related reading Use This ETF To Trade The Swiss Franc)

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Spot Market

Just the way a stock market provides a platform to buy and sell stocks, the foreign exchange market (commonly known as FX or forex) is the platform for trading in different currencies. Forex platforms offer a wider variety of currency pairs. Before plunging into forex, gain some basic knowledge of the market through a trading course or self learning. From there, it’s simple to open a forex trading account and begin performing currency trades in the same way as stocks.

The forex markets operate 24-hours-a-day, 5-days-a-week which provide a lot of freedom for investors and traders. These markets also allow trading on margin, a way for participants to increase investment amounts without actually having the capital. When using margins, always remember that leverage works both ways—it can magnify both profit and loss. The USD/CHF currency pair belongs to the category of major pairs (in other words, it is among the most widely traded and liquid currency pairs in the foreign exchange market). (Related reading Top US-Regulated Forex Brokers)

Futures and Options

Another way to invest in the Swiss Franc is through futures and options. Many people mistakenly think the opportunity to trade these derivatives is only restricted to stocks. The foreign exchange market offers retail traders these derivative products which manage the risks associated with currency rate fluctuation while taking advantage of profit opportunities from changes in currency rates. Forex futures trading and forex options trading are popular hedging techniques commonly used by banks and financial institutions.

These products are traded at many exchanges around the world with Chicago Mercantile Exchange (CME) being the most popular. CME introduced Swiss franc futures in 1972 followed by Swiss franc options in 1985. Several brokers provide a platform to trade in Swiss franc futures and options. (Related reading An Introduction To Trading Forex Futures and Getting Started In Forex Options)

Binary Options

The simplicity, flexibility, and ease provided by binary options have made them a popular choice for many in the forex market. Some of the popular currency pairs among binary option traders are the euro and U.S. dollar (EUR/USD), the British pound and U.S. dollar (GBP/USD), the euro and British pound (EUR/GBP), USD/CHF, and the U.S. dollar and Japanese yen (USD/JPY). The advantage of binary options is their simplicity. All you need to do is predict if the currency will move up or down.

The USD/CHF is a less volatile pair compared to other currency pairs, which can make predicting its movement difficult. Keep track of events that may influence the pair such as announcements regarding economic factors, monetary action by the U.S. Federal reserve, and actions by the Swiss National Bank. Other triggers to a movement between the two currencies can be gross domestic product estimates for either country, unemployment data, industrial growth figures, and national debt.

Experiment with a few other currency pairs and gain basic trading experience before moving on to the more challenging USD/CHF pair. You must also gain knowledge about technical analysis which will come in handy in forecasting the movement of the pair; these estimates must be backed by fundamental analysis. (Related reading Trading Forex With Binary Options)

The Bottom Line

Those interested in investing in Swiss francs must remember that foreign exchange markets, like stock markets, are prone to ups and downs which can have a negative impact on your position. Though the Swiss franc is usually stable above all, the Swiss National Bank’s recent decision to suddenly unpeg the value of the franc from the euro destabilized the currency, sending its value soaring. The episode is another reminder that currency movement is hugely dependent on the policies and actions of central banks in addition to macroeconomics. While risks exist, the Swiss franc, resting on Switzerland’s sound economy and financial system, will continue to be one of the safer investment options. (Related reading Why The Swiss Franc Is So Strong)

Pick The Right Settings On Your Stochastic Oscillator (SPY, AAL)

The Stochastics oscillator, developed by George Lane in the 1950s, tracks the evolution of buying and selling pressure, identifying cycle turns that alternate power between bulls and bears. Few traders take advantage of this predictive tool because they don’t understand how best to combine specific strategies and holding periods. It’s an easy fix, as you will see in this quick primer on Stochastics settings and interpretation. (See also: An Introduction To Oscillators).

Stochastics Construction

The modern or “Full Stochastics” oscillator combines elements of Lane’s “slow stochastics” and “fast stochastics” into three variables that control look back periods and extent of data smoothing. (To learn more, read: What is the difference between fast and slow stochastics?)

  • Fast K% – measures the closing price compared to specified lookback periods.
  • Full K% or K% slows down Fast K% with a Simple Moving Average (SMA).
  • Full D% or D% adds a second smoothing average.
  • Lower Fast K%, K% and D% variables = a shorter-term lookback period with less smoothing
  • Higher Fast K%, K% and D% variables = a longer-term lookback period with greater smoothing

Picking The Best Settings

Choose the most effective variables for your trading style by deciding how much noise you’re willing to accept with the data. Understand that whatever you choose, the more experience you have with the indicator will improve your recognition of reliable signals. Short-term market players tend to choose low settings for all variables because it gives them earlier signals in the highly competitive intraday market environment. Long-term market timers tend to choose high settings for all variables because the highly smoothed output only reacts to major changes in price action. (For related reading, see: Stochastics: An Accurate Buy and Sell Indicator).

SPDR S&P 500 Trust (SPY) shows different Stochastics footprints, depending on variables. Cycle turns occur when the fast line crosses the slow line after reaching the overbought or oversold level. (As outlined in: Use Weekly Stochastics To Time The Market Effectively). The responsive 5,3,3 setting flips buy and sell cycles frequently, often without the lines reaching overbought or oversold levels. The mid-range 21,7,7 setting looks back at a longer period but keeps smoothing at relatively low levels, yielding wider swings that generate fewer buy and sell signals. The long-term 21,14,14 setting takes a giant step back, signaling cycle turns rarely and only near key market turning points.

Shorter term variables elicit earlier signals with higher noise levels while longer term variables elicit later signals with lower noise levels, except at major market turns when time frames tend to line up, triggering identically-timed signals across major inputs. You can see this happen at the October low, where the blue rectangle highlights bullish crossovers on all three versions of the indicator. These large cycle crossovers tell us that settings are less important at major turning points than our skill in filtering noise levels and reacting to new cycles. From a logistical standpoint, this often means closing out trend following positions and executing fading strategies that buy pullbacks or sell rallies. (For more, see: What are the best indicators to identify overbought and oversold stocks?).

Stochastics and Pattern Analysis

Stochastics don’t have to reach extreme levels to evoke reliable signals, especially when the price pattern shows natural barriers. While the most profound turns are expected at overbought or oversold levels, crosses within the center of the panel can be trusted as long as notable support or resistance levels line up. Moving averages, gaps, trendlines or Fibonacci retracements will often intercede, shortening a cycle’s duration and flipping power to the other side. This highlights the importance of reading the price pattern at the same time you interpret the indicator. (To learn more, read: Introduction To Technical Analysis Price Patterns).

American Airlines Group (AAL) rallied above the 50-day EMA after a volatile decline and settled at new support (1), forcing the indicator to turn higher before reaching the oversold level. It broke out above a 2-month trendline and pulled back (2), triggering a bullish crossover at the midpoint of the panel. The subsequent rally reversed at 44, yielding a pullback that finds support at the 50-day EMA (3), triggering a third bullish turn above the oversold line. (See also: Strategies & Applications Behind The 50-Day EMA).

The Bottom Line

Many traders fail to tap into the power of Stochastics because they are confused about getting the right settings for their market strategies. These helpful tips will remedy that fear and help unlock more potential.

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