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Thought I’d change up today’s intraday post by doing a quick review on using volatility & psychological levels for finding potential reversal areas on major event days.

The general ideas is that currency behavior can be understood and measured by its average volatility (either by Average True Range or in Percentage terms), and when an asset moves in extremes of its average volatility, that’s when the potential increases for buyers/sellers to run out of steam on a momentum move, based on the behavioral history of the asset.

Combined with major/minor psychological levels, technical drawing tools and price patterns, we can potentially increase our chances of finding exhaustion–or even reversal areas–on a chart.

Luckily, we had the European Central Bank’s monetary policy statement and press conference today to boost up volatility and give us a few examples on a few of the most liquid euro pairs.

EUR/GBP: 15-minute

EUR/GBP 15-Minute Forex Chart
EUR/GBP 15-Minute Forex Chart

Daily Volatility Range: 95 pips ATR or 1.06%
Session Open Price: .8936

EUR/JPY: 15-minute

EUR/JPY 15-Minute Forex Chart
EUR/JPY 15-Minute Forex Chart

Daily Volatility Range: 140 pips ATR or 1.22%
Session Open Price: 113.45

EUR/USD: 15-minute

EUR/USD 15-Minute Forex Chart
EUR/USD 15-Minute Forex Chart

Daily Volatility Range: 82 pips ATR or 0.75%
Session Open Price: 1.0969

On the 15-minute charts above, we can see the potential reversal areas created when looking at major/minor psychological levels and the max average daily volatility levels. And on this particular ECB monetary policy announcement, the areas drawn out held and even drew in enough opposite orders to create a two-way market.

Of course, every event day is different and these levels could have been easily blown out of the water–which is why traders are risk managers first–but on days like this when expectations are met (e.g., no changes in the ECB’s monetary policy today), the probability increases that an asset will stay within its normal behavior patterns.

Overall, average volatility and psychological levels are closely watched by a lot of traders out there, so it’s a good idea to frame your entries, exits and position adjustments around them, especially when underlying market drivers stay relatively the same.

Forex Chart Settings:

Slow Stochastic: 14, 3, 3
100 SMAs: Blue line
200 SMA: Red line

To get the complete picture and avoid getting blindsided by economic data, you also have to do your fundamental analysis. Lucky for us, Pip Diddy fills us in on what we need to know about fundamentals with his Daily Forex Fundamentals.