One of the most effective avenues for determining the prices consumers and producers are willing to pay for currencies are through futures contracts. These are financial instruments obligating the buyer to purchase a specific product at some point in the future (hence the name). Most traders do not physically take possession of them. Instead, they will trade these products to generate profits by speculating (as to if prices will be rising or falling). Currencies are no different, with them using these derivatives to take advantage of the volatility in the marketplace.
In the case of case of Euro / US dollar pair, prices have become volatile. This is from fears surrounding a slowdown in developing economies and geo – political tensions (from the Ukraine to Iraq). To fully understand what is happening requires focusing on the most effective strategies. This will be accomplished by focusing on positive and negative effects utilizing multiple indicators. Together, these elements will underscore the effects they are having on the short term price movements.
What is the most accurate combination of technical indicators for predicting positive and negative price movements in UER / USD currency pairs for one minute intervals?
To determine which indicators are the most effective requires comparing them with tools that will identify trading opportunities when they are first appearing. However, in order to understand what is occurring requires comparing various tools that will assess the environment, trends and the volatility. This is achieved by focusing on a number of areas to understand the trends, volatility and effects of external factors. It offers a better understanding about what is happening and the long term effects.
In the case of the EUR / US dollar, the best position to take is the September 2015 calls and puts with a strike price of $1.22. This will allow the position to move up in either direction and determined bullish or bearish patterns. However, in order to determine which avenue is the most effective requires carefully examining if the position is experiencing bullish or bearish trends.
Technical Analysis Tools
To take advantage of what is happening requires analyzing the underlying trends and taking a straddle position. Straddles involve simultaneously buying equal numbers of calls and puts. The expiration and strike price are the same. The key for successfully using the strategy is to ensure that there is enough time to realize the volatility from up or downward pressure before expiration. This is useful in helping to analyze the bullish and bearish changes in the EUR / USD.
To determine bullish and bearish patterns requires using a number of technical indicators in conjunction with each other. The most notable include: using the relative strength (RSI), the stochastic and examining the volume in contrast with support or resistance levels. The RSI is identifying the overall amounts of upward or downward pressure. It determines levels of buying or selling pressure by going from 0 to 100. If the position is showing reading of 20 or below, this is indicating oversold conditions. Conversely, a reading above 80 is telling investors that a correction is likely. The stochastic; helps in determining if prices are overbought or oversold. This takes place by following a similar scale as the RSI. The volume is used to determine the amounts of buying or selling pressure. The basic idea is to corroborate these indicators with each other at key support or resistance levels. This will allow us to determine if prices are rising or falling.
In the case of the EUR / US dollar, the best position to take is the September 2015 calls and puts with a strike price of $1.22. This is trading above support levels of $1.20 going back to 2009. However, during the last trading day of December 26th, the volume has been tapering off. This is following a decline in the prices from $1.25 since December 16. This is when the volume increased to some of the highest levels of the year.
At the same time, the RSI and the stochastic are indicating that the price has further room to decline. This is because both are showing that the derivatives are trading at in a downtrend which began in 2009. Since this time, they have been falling to lower lows. Recently, the options have become attractive. This is because the they are approaching long term support of $1.20. Going back over the last ten years, this level has proven to be advantageous with long term bottoms and shifts in the underlying trends occurring.
This means that they identify bullish to bearish shifts and vice versa. The key is watching this level and seeing how the futures react. If it holds and moves higher, there is realistic possibility prices will reverse and start moving higher. However, in the event prices fall through this level, is point new lows will occur.
The best strategy is to watch the $1.20 level and considering moving into the September $1.20 calls and puts (when it reaches support). This will allow traders to take advantage of changes in the underlying trends. However, for those who want to take advantage of any movements the September 1.22 calls and puts are beneficial. This is because it is considering change in both directions by purchasing two areas that will benefit from these movements.
Using the Monte Carlos simulation shows that there is a 78.31% of the option being sold for a profit. While at the same time, there is 34.82% probability of the position going into a free fall and the put becoming profitable. Moreover, it is indicating a 46.22% chance of it exceeding the upside and 34.82% possibility of seeing declines through the $1.20 level and testing $1.00. These insights are useful, in illustrating how the combination of these technical indicators are highlighting shifts in the trends. The key is being able to monitor what is happening and position based upon the volatility the EUR / USD is experiencing.
The one minute chart is showing how these levels are long term support. This is a bullish sign with these changes becoming more pronounced at these levels. The RSI, the stochastic and the volume are confirming the oversold conditions. This is correlated by taking a longer term perspective going back over the course of many decades. In these situations, the EUR / USD touched these levels and began steadily moving higher. This occurred since December 26th with the currency touching $1.20 and bouncing off this level.
From a minute by minute perspective, the key is to watch support and resistance levels. Then, compare the prices movements with previous changes go back over the course of many years. This offers a larger perspective about these shifts. At which point, the way the currency is reacting will influence the underlying amounts of sentiment. The volume, stochastic and RSI are utilized to address these issues.
The Monte Carlo is looking at the risk valuation for a position. In the case of EUR / US dollar pair, it shows that there is a 78.31% of the option being sold for a profit. While at the same time, there is 34.82% probability of the position going into a free fall and the put becoming profitable. These figures are corroborating the technical indicators by showing how the position has become bullish. However, the markets are ran by fear and greed. This means that no strategy will work 100% of the time. In this case, it is effective in understanding these shifts and the effects they are having. As a result, this strategy has an accuracy of 78.31% in confirming key trends and identifying new ones that are emerging.
Previous Literature versus the EUR / USD Strategy
The different sources showing how there is a direct connection between price movements expectations about events in the future. During periods when there are greater amounts of fear is the point the underlying amounts will rise. While at the same time, stability inside the marketplace will results in readings below these numbers. In general, the greater the move in either direction the stronger opposite reaction will eventually occur.
During the Global Financial Crisis there was a direct correlation between rises in volatility and the overall amounts of fear in the EUR / USD. This led directly to dramatic selloffs in the equity markets because of these views. The resulted is currencies and the equity markets experience severe declines from these movements. During 2007, this approach was used to identify changes in bullish and bearish trends when the EUR / USD.
Conversely, once the crisis ended, is the point it declined. From 2009 to 2010, this resulted in the index experiencing move bullish readings. This is because investors began to have greater amounts of confidence in the future and reflected these attitudes in their trading strategy. These insights were conducted by studying the direct effects of fear and their influence on the kinds of strategies investors were using. In this case, during times of uncertainty, they were actively buying puts to hedge their equity stock positions or utilizing straddles to take advantage of extreme movements. Moreover, they also began openly selling their positions because of the uncertainty surrounding the overall impact of the Global Financial Crisis on their portfolios. After it became clear that these events were over, is when they began utilizing strategies that were bullish. This occurred with the EUR / USD by touching the $1.20 support level. The minute by minute movements used in conjunction with the volatility provides a clearer perspective about what is happening and the influence this is having on prices. The volume, stochastic and RSI are critical in determining the amounts of bullish or bearishness.
These insights are showing how there is a direct correlation between movements in the volatility with expectations about the future. This is useful in understanding the overall amounts of fear before, during and after the Global Financial Crisis. As a result, it is an effective tool in understanding how uncertainty is directly tied to extreme movements in options prices.
Moreover, Poon is adding to these insights by utilizing both the stochastic and Monte Carlo approaches to determine the impact of volatility expectations on options prices. What he concluded, is that both were effective in determine future moves of the markets by analyzing rises in conjunction with fear. During the Global Financial Crisis is the point he was applying and monitoring these shifts. In this case, whenever volatility rises, there is a clear indication that traders are becoming fearful. Recently, we used the Monte Carlo simulations to determine the odds of the EUR / USD showing a shift from bearish to bullish trends.
Poon is adding to these insights by utilizing both the stochastic and Monte Carlo approaches to determine the impact of volatility expectations on options prices. What he concluded, is that the two were effective in determine future movements of the markets by analyzing rises in conjunction with fear. These insights are showing how technical indicators can be utilized to understand the long term trends and identify changes when they are emerging.
The data was collected through carefully analyzing a number of sources. In this case, the information was collected by looking at the findings and then comparing them with the different models being utilized. The study from Tang is providing a foundation for understanding when fear is rising and declining. The information he provided, is being used to establish parameters for the data that was collected from other studies.
Jones is building upon these insights by demonstrating how hedging is a common practice utilized by traders. In these situations, he found that there is at 63.74% probability investors will be utilizing this as a way to protect their downside during period when the markets are experiencing greater amounts of volatility. This is illustrating how volatility is shifting when there is change in the underlying trends.
The Monte Carlo method is effective in determining if the movements in the volatility are indicators of the future performance of the markets. He measured its effectiveness in various time periods during and after the Global Financial Crisis. In these situations, he determined that this is an effective tool to predict shifts in the attitudes of investors and the actions they will take. This was tested using EUR / USD to determine when a change in strategies should take place and the timing of them. The key is to corroborate various timeframes with indicators to understand these transformations. This offers a much larger perspective about what is happening on a minute by minute basis in conjunction with other tools.
Clearly, there is a direct link between volatility, expectations and currency prices. This is because fear or greed will have an influence on the kinds of positions taken by investors. In the future, this will result in market declines or strong advances based upon the underlying amounts of volatility. However, there are limitations with this approach, as it not 100% accurate. Instead, we can say that there is a probability something will happen. This means that there will be times when the prices could be going through periods where false signals will occur. This is something that will happen in all bull and bear markets, as no single average will move straight up or down. In every single case, they will trade in an uneven pattern marked by trends and counter trends.
As a result, this provides a working foundation about how this will influence the mindset of traders to understand what is affecting their strategies. Those who comprehend this will be more effective in connecting with them and applying these concepts as a part of their overall opinions surrounding what is happening with currencies. When this takes place, they will be able to utilize this information to gauge if traders are becoming fearful or are more willing to take risks on their own.
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