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Central Bank Interventions in forex – (This can ruin your account in just few minutes)

October 31, 2011
From this post I am going to explain about central bank interventions in foreign currency exchange. Though this is not that common incident in forex market, it is important to have an idea about these interventions because these interventions happen to the opposite direction of the main trend or can ruin your trading account in just few minutes if you don’t have a stop loss.
  • Why these central bank interventions happen?
The value of their currency is very important for all the countries and if the currency is strong, it is supposed to have a good economy in that country. But if the currency is too strong it affects to the exports of that country badly because the value of exports also increased and demand is decreased according to that. The best example for this is Swiss frank(CHF). So to overcome this problem the value of the currency should be kept in an acceptable range. The central bank of that country decides that and if the price is not within that range, bank corrects the price and this correction procedure is called as the central bank intervention in foreign currency exchange.
  • What is the danger of these interventions to forex traders?

Usually all the traders trade to the direction of the main trend but these interventions occur to the opposite direction of the main trend and usually price is changed from about 200-300 pips within a very small time usually within few hours. You can see such intervention in the figure below but it is about 4 times bigger than an usual intervention.

Central bank intervention in GBP/CHF chart

  • Can I identify these inventions before they happen?

It is really difficult to tell the exact time that it happens but you can get an idea whether an intervention is likely to happen or not by studying the opinions of the central banks about their currencies and interest rates. If the interest rates are reduced they want their currency to be weaken or their economy is going down. Sometimes you have to be aware of market rumors about these interventions. However it is not that easy to catch these big movements.

  • I don’t use a stop loss but I monitor my trades always so I can close my trade if it goes to the opposite direction so why it is difficult to do it here to prevent my account from a sudden unexpected intervention ?

When these interventions happen, price is decreased or increased with a very high rate sometimes it is changed from about 30 pips just within a second. So when you try to close your trade, you will probably get re quotes in MT4 software and finally end up with a big loss or even with a margin call. So it is very important to have a stop loss to prevent your account from this kind of things( you should never trade without a stop loss)

I think that you got a good idea about this CB interventions and try to be aware of them. Central banks never think about traders like us.

You can see these posts in my other blog too http://forex-trading-withme.blogspot.com/

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