Time Decomposition of FX prices

In this method, I investigate the behaviour of prices in off-market hours - if they have a consistent drift, and whether it could be used as a trading strategy.

The currency pair I've chosen to start with is the USDCAD as both countries share the same broad timezone. This makes for easy identification of 'busy' hours (normal trading hours) and 'quiet' hours (major markets are closed).

From there, we can construct two new price series consisting only of movements within those hours - one for busy, one for quiet.

The preliminary results (for the sample period 2018) indicate that the movements in the pair were driven mainly by activity in the Busy period - seeing how the Busy moves almost alongside the Actual. This is an expected outcome - we expect  that real money (coming in during the market hours) are what drives prices and create permanent impact.

However, the Quiet period, over the course of days/weeks, can move in the opposite direction of the Busy trend. As examples, the major down move from Jul to Oct driven by Busy period was partially offset by the Quiet period upward move. The following rally by Busy was also partially dampened by Quiet in Oct to Dec.

Do note though that this mean reversion in quiet hours is not strong enough on a daily basis to warrant a fade-the-move style of trading. The daily change correlation is near 0, and the cumulative prices correlations are near 0 too.

We need to dig deeper into how this effect plays out on an aggregate level to produce the offsetting effects we see in the 2 example periods highlighted above.

FX Weekly – 2019 Week 22

Summary:

  • EURUSD ►aggressive longs can be taken into any overshot to the downside, but exit fast as the bottom is impossible to pick
  • GBPUSD ► ST buy can be made against current support / lows of 1.26 (see chart)
  • USDJPY ▲ next support at 108.50 to 108.30 zone - add to long term buy position here
  • USDCHF ► low confidence ST buy at trendline support
  • AUDUSD ► still drifting lower with no end in sight
  • USDCAD ▲ aggressive buy against support 1.34
  • NZDUSD ► good and conservative opportunities not available

Continue reading "FX Weekly – 2019 Week 22"

FX Weekly – 2019 Week 18

Summary:

Finally after few weeks of lull the markets have moved again. Be wary though as the momentum has just started, and so any reversal trades have to be closely watched.

  • EURUSD ►new lows made, and aggressive longs can be taken into any overshot to the downside, but exit fast as the bottom is impossible to pick
  • GBPUSD ► drifting lower in the absence of catalysts, but no medium term opportunities
  • USDJPY ▲ maintain long bias but be careful of stops this week as it is a week-long JPY holiday - that being said, any liquidity-driven spikes can be traded in the opposite direction (mean reversion)
  • USDCHF ► the move up was anticipated, and aggressive shorts can be placed at 1.03 levels
  • AUDUSD ► good and conservative opportunities not available - await formation of bottom
  • USDCAD ▲ look to buy on a small dip this week, but the RRR is not too good as the pair is in the upper range of the channel
  • NZDUSD ► good and conservative opportunities not available

Continue reading "FX Weekly – 2019 Week 18"

FX Weekly – 2019 Week 15

There are no good opportunities as of now - the market is a little too quiet. Bias remains the same as per 2 weeks ago.

Only exception is GBP being at support - can be a buy into the week ahead, but this is going against the main trend.

FX Weekly – 2019 Week 13

Summary:

Charts below now show aggressive entries, and stop levels in red

  • EURUSD ►last week's sell would be taken out if a hard SL was set - this week's aggressive entry is long against lows of 1.1170
  • GBPUSD ► opportunity to short, with possible stops indicated in red (see charts below)
  • USDJPY ▲ longs would have been taken out at BE at worst, but this week may be ok to go for a small long position
  • USDCHF ► look to long at trendline support (see chart below)
  • AUDUSD ► good and conservative opportunities not available - await formation of bottom
  • USDCAD ▲ look to sell if prices overextend to the upside
  • NZDUSD ► still in a LT range, so wait for 0.7150 for short opportunities

Continue reading "FX Weekly – 2019 Week 13"