Most momentum models have some input from moving averages, which is why some time ago we developed our moving average / Bollinger Band model to give us insight into what momentum traders/ models / and funds are likely to be doing at any given time given the underlying instruments’ departure
from and eventual reversion to the norm, a central characteristic of market dynamics over time. Bollinger Bands are excellent measures of this momentum as unlike other technical valuation studies they expand as volatility increases and contract as volatility decreases.
This proves to be an advantage in volatile intraday markets because it widens targets for counter-trend trades in volatile times and brings them closer to spot when trading stabilizes. Bollinger Bands are also based on standard deviations from the norm, so we utilize primarily 1.0, 2.0 and 3.0 Bollinger Bands to determine normal price fluctuations (+ or – 1.0) overbought / oversold (+ or – 2.0) and Heavily overbought or oversold (+ / or – 3.0). These work well for averages over 72-hrs, anything less needs to be monitored for effectiveness/
When we marked our blended EUR/USD Moving Average / Bollinger Band model to market this afternoon at 1.1337 the model had shifted from -9 EUR/USD contracts at yesterday’s close to -1 contract this evening. Given the fact we designed our model to always have a small bias as a minimum (odd numbers so it can’t be square) this is as close to flat it can be without tipping marginally long (+1 at 1.1344).
Considering the blended model was -15 contracts Monday morning, this demonstrates the effectiveness of multi-layered M/A systems to track the trend whilst insulating the longer term models from late exit signals. Above 1.1343 our blended model won’t flip to maximum long until we breach 1.1489 however if we cross 1.1380 the model will be fairly long (7 contracts) but won’t add until 1.1438, suggesting we should enter a 2-way price action phase between 1.1380-1.1430.
Another feature of a multi-layered M/A based system is that both the short term and the longer term M/A Bollinger Bands act as model restraints, effectively preventing any serious overshooting. As an example when we tested 1.1175-76 lows on ECB day our blended model registered 1.1180 as oversold and as noted above, for longer M/A readings +/- 2.0 rein in all but the most extreme market fluctuations and will eventually revert to the norm.
Today’s market action reveals the opposite of that phenomenon, whilst the long term M/As don’t flip until 1.1437-89, the 24-72 HMAs would register Bollinger Band readings of +8.0 and 5.8 respectively, so unless there’s an SNB or Brexit like event it really is impossible.
On a highly volatile event day (ECB, Fed meeting, non-farm payrolls) we rarely see +/- 5.0 Bollinger Band readings and if we do, they’re reversed quickly. Thursday the 24-HMA hit -4.0 and the 72-HMA hit -4.5 and that was an extraordinary day where the ECB revealed a dovish lower-for-longer hold against all market expectations.
EUR/USD is trapped between the effect of short term vs long term averages, overbought and oversold levels in the respective averages will continue to constrain EUR/USD mobility