22ND, 23RD, 24TH FORECAST: GBPUSD - BREXIT PRICE ACTION ANALYSIS
UK 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*
- 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*
