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Scottishreferendum

22ND, 23RD, 24TH TRADING STRATEGY: GBPUSD - BREXIT/ REFERENDUMIn the previous post we have used the Price Action data from the Scottish UK Referendum for GBPUSD for the 3-days on and around the vote so the 17th, 18th (vote day) and 19th (result day) of September 2014 as a gauge to forecast whats in store for Price action on Wednesday, Thursday and Friday this week (the parallel days for both of the referendums). Reliability of the estimates made in the previous post: 1. Given the excessive absolute implied volatility (larger than 2007 levels) which is likely to be anywhere between 40-60% on the day(s) as we currently trade near 30%; and the excessive relative implied vol levels compared to the SUR, which only realised 9% at the time, which is 5-8x less than the market expects for the Brexit vote, the daily range estimate of 340-480pips for each of the 3 days on average is warranted - especially as we have already realised an ATR of 371 last week on the 17th, thus making a 480 pip range not particularly unlikely. - Historical Vol for UER has also traded 80%+ higher already in the last 3 days compared to SUR. - these implied and realised volatility differentials in mind, I also think the range of 1.35-1.57 is also prudent, though i think the risks are skewed to the downside of the model rather than the upside. Trading Summary: - For 22nd, 23rd, 24th we predict an ATR of 340pips, currently trading at 1.47 which is a 4x resistance level on the Daily, i think this range will be skewed to the downside, so I advise shorting GBPUSD >1.47 with SL at 1.484, TP anywhere from 1.46 to 1.40 for 2 reasons: 1) range trading in mind, a scalping 50-100pip strategy may also be useful given the high expected volatility and range, shorting all pullbacks to 1.47 may enable several 50-100pip TP trades. 2) Given the high expected range (340-480pips) and 500pip Standard deviation, the long-term play e.g. 1.40tp is also one I am trading as GU is likely to reach these levels in this environment of unparalleled volatility. -Currently I am splitting my margin between scalp trades and long-term GU positions (good for portfolio diversification) at this point in time, e.g. I have a few GBP shorts with close TP and a few with longer TP targets, this reduces my macro portfolio risk:reward as you reduce the risk of the shorter trades, but increase the reward of the longer trades. - ATM I am 8.5/10 short GBP vs USD and CHF (JPY is too volatile - 25% more so than GU and GCHF) Risks to the Trading strategy: - If GU breaks and holds above 1.485, my short play conviction falls massively to 2/10 (from 8.5/10) as for me it signals a potential trend reversal for GU to price higher since 1.47 has held for 6 months - I will cut all shorts past 1.485 and I am not interested in shorting GU if it holds past 1.48. - Further, there are risks that due to massive expected volatility/ uncertainty, game theory fears everyone out of the market e.g. everyone is too scared to trade, thus the spot market trades paradoxically against the volatility and realises flat price action since there is no volume. - This forecast and strategy is based purely on range bound trading (as guessing the direction IMO is too difficult giving the volatility/ uncertainty in the market and also as I believe the market should realise large ranges - thus validating the strat), however if the range/ price action assumptions do not hold true to some degree e.g. we trade flat or just rocket north, then the Short only strategy is obviously flawed. *See the 22nd, 23rd, 24th Forecast PA post attached to this one which shows the forecast used*
Short
by QuantumLogicTrading
14
22ND, 23RD, 24TH FORECAST: GBPUSD - BREXIT PRICE ACTION ANALYSISUK EU Referendum (Brexit) vs Scottish UK Referendum Price Action Forecast: - We will use the difference in ATR and volatility between the 3-day run up into UK EU Referendum (UER) and the Scottish UK Referendum (SUR) in order to forecast what we expect price action to show on the 22nd, 23rd and 24th. 2014 SUR 3-DAY EVENT (17,18.19) 1. 1-Period ATR for the 17th 18th and 19th was 110pips, 163pips and 241pips - average of 171pips 2. 3-Day range was: 280pips - 1.6240 to 1.6520 3. On the day 12noon Implied ATM vol 17th-19th was: 8.8% 79th, 8.01% 52nd, 6.97% 22nd 4. On the day 10-period Historical Vol was: 10.4%, 10.4%, 11.1% 2014 SUR 3-DAY LEAD UP (14,15,16) 1. 1-Period ATR for the 12th 15th and 16th was 73pips, 53pips and 149pips - average of 91pips 2. 3-Day range was: 150pips - 1.6150 to 1.6300 3. On the day 12noon Implied ATM vol 12, 15, 16th was: 8.82% 76th, 9.34% 87th and 8.45% 65th 4. On the day (12,15,16) 10-period Historical Vol was: 10.9%, 10.8%, 10.4% vs 2016 UER 3-DAY LEAD UP (17, 20, 21) 1. 1-Period ATR for the 17th, 20th and 21st was 195pips, 371pips 155pips - Average of 255pips 2. 3-day Range was: 580pips - 1.4195 to 1.4775 3. On the day 12noon Implied ATM vol was: 23.2% 100th, 24.3% 100th and 20.16% 99th 4. On the day 10-period Historical Vol was: 14.1%, 19.4%, 19.2%; *2016 UER 3-DAY EVENT (22, 23, 24) FORECAST* 1. 1-Period ATR for the 22nd, 23rd and 24th FORECAST: `293pips, 1141pips, 250pips; (171pips/91pips)*255pips = average 480pips (average adj 340pips), SD of 500pips 2. 3-day Range FORECAST: +/-1100pips - 1.4600 to 1.3500-1.5700 3. On the day Implied/ Realised ATM vol FORECAST: Event Volatility has been implying anywhere from 30%-60% over the brexit 3 day period, with ATM currently trading at 26% already. Evaluation: 1. The price action forecast around the event suggests that we could see a 1100pip range over the next 3 days (22, 23, 24) - given that we dont know the direction of the range, we can assume a distribution of 1100pip +/- at the current trading price thus forecasting GBPUSD to trade anywhere between 1.35-1.46-1.57. - Further, the model expects an average daily range of 480pips, with the vote day skewing the average significantly (1141pips), therefore i think a 340pip (average adjusted) daily range is more likely. 2. Combining the estimated distribution range of 1.35-1.46-1.57 with the standard deviation of the foretasted daily ranges = 500pips, the model ends up showing significant statistical relevance by backward validating itself e.g. +/- 2SD of the mean at 1.4600 is 1.5600 and 1.3600 (+/- 2*500pip). Before knowing this the model had already forecasted a 1.35-1.57 range thus this is somewhat reassuring as the model held true when back tested using +/- 2SD. 2SD is significant as it accounts for 95% of outcomes. - The model also estimates that the tail risk of a BREXIT would cause GBPUSD to fall -3SD which is down to <1.31 (1.46 minus 1500pips) - this is also somewhat close to what I would have expected the day after the vote. *See the 22nd, 23rd, 24th Trading strategy post where I link this information to execution*
Short
by QuantumLogicTrading