The focus of the market is firmly on EU assets as we head into the ECB meeting, and the Nord Stream 1 pipeline flow call from the Russians – not to mention Mario Draghi’s likely formal resignation. If you’ve got EUR exposure, be aware this is a news-driven market, and with EURUSD overnight implied vols at 52-week highs it could get a little wild out there.
I talked up the idea of momentum trading yesterday, and where a momo move can morph into a trend – traders should know the difference between momentum and trending markets – momentum is a vector, meaning in this case it looks at the magnitude in the relative change in price (over a period) of an instrument AND the direction. Today, we look at levels to fade EURUSD strength, as I believe you can and, in many cases, should run multiple strategies – diversification in positions is great but diversification in strategy can be even more powerful.
There are many ways to trade mean reversion – one that seems to be working for now is to use a regression trend – it is not so much using a ‘mean’ in a statistical sense but a line of best fit through a trend. Using the current trend from early February we see price working nicely within the regression channel, which adopts (as the default setting) 2 standard deviations of the line of best fit. These relationships obviously do eventually break down, but for now, I would maintain a view that it holds and will fade extremes - buying into 0.9930 and initiating shorts into 1.0460, which also happens to be the 50-day MA, a variable many use as a trend filter.
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