The European Central Bank (ECB) is the central bank for the eurozone. One of its tasks is to set and implement European monetary decisions. This includes the use of the interest rate tool. One of the objective of the ECB is the price stability. The ECB offers banks the facility to borrow money from it. The banks pay interest on the loan, which is called the refi rate or refinancing rate. The vote of the six members of the ECB Executive Board and the 16 governors of the euro area central banks to set the rate can be very interesting in a trader or investor strategy.The ECB statements are statistically correlated to the EUR/USD volatility as described in David-Jan Jansen and Jakob de Haan (2003), this interest in FX volatility patterns is not only matter of researchers but also of the investors and traders that can incorporate these studies in their models trading and risk management purposes. The empirical literature presented in http://www.dukascopy.com/fxcomm/fx-article-contest/?Us-Gdp-Strategy&action=read&id=2138#read-article (De Gennaro and Shrieves 1997; Andersen et al., 2003; Bauwens et al., 2005; Dominguez and Panthaki 2006; Laakkonen 2007a) can facilitate the setting of a trading strategy in a no linear dynamics. Considering the literature results and the empirical strategy formulated, this article try to contribute to the Dukascopy Traders Community in different ways.
- It is explained the ECB 69.9 Pips strategy
- It is presented ex ante and ex post measure of volatility for each ECB decision with different interest rate between the forecast and the data in the EUR/USD.
- It is presented a measure of pips gain for each investigated ECB decision .
- It is presented a chart with the pending orders, the Stop Loss and the Take Profit of the strategy and the way to calculate them.
- It is reported the empirical results of the tested strategy during the releases between 11/2013 and 12/2014.
- It is reported a discrete numbers of scientific papers where traders can find support to their ECB statements volatility strategies.
- The Strategy indicated a Take Profit of 69.9 and an average Efficient Take Profit of 132.94, so considering the Strategy Take Profit there is an average Hedge from slippage and Spread of around 63.02. Did you have had a spread or slippage of that magnitude in EUR/USD?
Since ECB announcements should only result in revisions of market expectations of uncertainty if new information is released, i.e. if the announcement surprises the market, it should be considered a trading strategy that consider the discrepancy between the actual contents of the interest rate and the forecast contents before the ECB decision. Considering the volatility of the pair during the ECB statements, the results obtained from the literature suggest an ex post structure trading strategy. The ECB 69.9 strategy applied to the EUR/USD indicates that there are profit opportunities in ECB announcements.
In this paper the Dataset about standard deviation that corresponds to the volatility and about the rate exchange are provided by the dukascopy platform. The dataset collect 1 min data from 11/2013 and 12/2014. The prices of the chart images are formed by taking the bid quotes. With 1 min data it is possible to assume no cycle or filtering methods in the statistics.
It can be evaluated the EGARCH procedure similar to the Nelson (1990) model to calculate the theoretical profit and the volatility.The empirical results support the Cheung and Chinn model and the research of Jansen and de Haan. Traders who have intenctions to create an hypothesis test should utilyzed a large scale of data set and could formulate a Wald test for the null hypothesis.The empirical EGARCH model applied in the EUR/USD pair give as results that the volatility ex post can be statistically different from the volatility ex ante.
This statistically relevant volatility measurement can support a formulation of an ex post strategy.
THE ECB 69.9 PIPS STRATEGY
This strategy consist in to put a buy or sell at market order 1 min after the ECB decision on the EUR/USD currency pair only if the result of the ECB decision differ from the forecast. The strategy is tested on a 1-minute bar charts (M1) to open the order. To apply this trading plan you need to find a broker that support to trade on ECB statements. The ECB 69.9 Pips Strategy is tested with the Dukascopy Platform
- Open the Cable M1 Bar Chart.
- Around 1 min after the ECB votation, it should be opened a buy at the market order in your trading platform if the difference between value and forecast is positive. On the contrary if the difference is negative you should open a sell at the market trade.
- The SL is 20 pips far from the order, the TP is at 69.9 Pips.
The figure 2 - 3 - 4 shows the chart at 7-11-2013 h. 13.30 GMT
- 67.9 %
Hedging From Slippage and Spread
The figure 5 - 6 - 7 shows the chart at 5-6-2014 h. 12.30 GMT
Trade 3 Lots
- 69.91 %
Hedging From Slippage and Spread
The figure 8 - 9 - 10 shows the chart at 4-9-2014 h. 12.30 GMT
In this paper, it is investigated the relevance of the ECB interest rate announcements on the volatility of the EUR/USD exchange rate returns and it is presented a profitable trading strategy during the tested releases. The ECB 69.9 Pips strategy from 11/2013 and 12/2014 has been profitable.
It has been considered a TP of 69.9 to consider an absorbition of slippage and spread. It is also possible to think a different TP strategy.A dynamics decision on when to exit. The MACD, or moving average convergence/divergence indicator, can be very effective in identifying a change of trend after a strong directional move, which in turn is a signal to exit the position.
The theoretical literature suggested some very interesting implications of the volatilities on trading ECB decisions, which were reported in the Introduction. The results could not directly be interpreted in the light of any of those models, the data set is not statistically consistent for test hypothesis. Even this study is purely empirical, the results provide informations about the dynamics of the EUR/USD pair pattern after the ECB statements.