In 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*
yes, i dont think we will break the 1.48 handle yet though. A vote to remain will likely push us past 1.50 for several days, until momentum trades us back to 1.49 - the risk is skewed massively to the downside for GU as even in the long run the $ is likely to trade heavier than the pound.
alan_watch
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As I commented on your post when GU was around 1.41~42 (which I bought...) I was looking for a corrective structure around 1.45 but after the gap rise I was expecting 1.46-47 at most maybe 1.48 but it hit 1.49. Now I am not so sure if it is safe to take short as of now though... what are your thoughts?
alan_watch
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At this moment I'd rather take step back wait for it to observe price action and take short position above 1.50
QuantumLogicTrading
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Yeah I agree, im completely risk flat with GBP at the moment. The minute the 1.48 handle didnt hold I didnt want any part of GBP.
I think UK will vote "remain" GU will trade to 1.545, and I will be looking to short/ fade these extremes.
alan_watch
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Thank you, today is a memorable day for me ... very successful trade downside (1.408 partial profit 1.34 full profit) and currently holding long from 1.332.
After nxt week I might just take vacation to Caymans haha.
I hope you were in trade too!
QuantumLogicTrading
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haha thats good! I think Upside for GU is capped at 1.40, to be honest im surprised we are not trading <1.30 with brexit winning and OM Resigning.
alan_watch
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yeah I was expecting another drop after David Cameron decides to resign but looks like 250B pound from BOE is kicking in but we'll see... but if GU goes to 1.40 level or perhaps to 1.42 we'll know what to do there for sure :)
QuantumLogicTrading
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The 250bn from the BoE should definitely see the £ trade back down to the 1.32 lows, its significant easing given that QE to date has only been 350bn, thats a 66% increase. However, such action should also help support risk assets (FTSE100) in the near term - which i was surprised that didnt manage to trade to march low.