Price action behavior in GBP/USD and USD/CHF
We group these two currency pairs together because they share similar market liquidity and trading interest, which are the main drivers of price action. The more liquid a market is, the more smoothly prices will move; the thinner the market, the more erratically prices will move. In both pairs, liquidity and market interest tend to be the thinnest among the majors, especially outside of European trading hours. As a result, both pairs typically trade with wider 3- to 5- pip prices relative to narrower spreads in EUR/USD and USD/JPY.
The most important trading characteristics of sterling and Swissy are as follows:
Price action tends to be jumpy, even in normal markets. Cable and Swissy are like long-tailed cats in a room full of rocking chairs – extremely nervous. In a relatively calm market, you can see prices in these two pairs jump around by routine 2- to 3-pip increments.
When prices are moving in response to news or data, those price jumps can be even more pronounced, frequently changing by 3 to 5 pips between prices. Online traders are also likely to get more “rates changed” responses when trying to deal on the current market price. That response means the price changed by the time your trade request was received and the attempted trade was not completed. The subsequent price may be 2 to 3 pips higher or lower than where you first tried to deal.
Price action tends to see one-way traffic in highly directional markets. When news or data move the market, the price changes in Swissy and cable are apt to be the most abrupt. If a data report sends EUR/USD higher by a quick 20 to 30 pips, cable and Swissy are likely to see prices move by 30 to 40 pips or more. On top of that, cable and Swissy will remain highly directional and tend to see minimal pullbacks or backing and filling.
Look at cable and Swissy and leading indicators for EUR/USD. One of the ways that experienced traders judge the level of buying or selling interest, how bid or offered a market is, during a directional move is by looking at how cable and Swissy are trading. For example, if bids in USD/CHF keep appearing in a relatively orderly fashion, say every 1 to 2 pips on a downswing, it’s a sign that the move is not especially extreme. On the other hand, if the prices are dropping by larger increments and displaying very few bounces, it’s a strong indication that a larger move is unfolding.
False breaks of technical levels occur frequently. Cable and Swissy also have a nasty habit of breaking beyond technical support and resistance levels, only to reverse course and then trade in the opposite direction. And we’re not talking about just a few points beyond the level here, but more likely 25 to 30 pips in many cases. The frequency of false breaks is a result of the relatively lower level of liquidity and market interest in these pairs. Instead of having a selling order at technical resistance, which you may reasonably expect in EUR/USD or USD/JPY, there may only be a stop-loss buying order beyond the resistance in cable and Swissy.
Spike reversals are very common. The tendency of cable and Swissy to overshoot in extreme directional moves and to generate false breaks of technical levels means that spike reversals appear frequently on short-term charts. Though the size of the spikes will vary depending on the market circumstances and current events, spike reversals of more than 30 to 40 points on an hourly closing basis should alert you to a potentially larger reversal taking place. The bigger the spike reversal (and it’s not uncommon to see 50- to 70-pip spikes in cable and Swissy), the more significance it holds for the future direction.
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