The recent surge in Sterling stimulated a large amount of commentary on how “overbought” it is at current levels. I am personally skeptical when somebody talks about overbought/oversold, because to my knowledge there really is no clear way to calculate a “fair value” for a currency. Relying on some technical oscillator is also futile. So is there any simple and logical way to at least get a sense for how “overdone” a directional move may be?
Monthly, Weekly and Daily Space Travelled
I would like to reiterate that the markets will move aggressively when there is a strong fundamental driver pushing prices up or down the ladder. Sterling was recently influenced by an unexpected hawkish stance from the Bank of England and as you may know, central banks are the main protagonists within FX.
So one way to evaluate whether a directional move has legs, is to simply pay attention to the driver. Is it strong? Is it evident? Is it unexpected? Then you may have a runner.
But all moves run out of gas sooner or later. Here are some statistics gathered by using my preferred way to gauge “space travelled” by any financial asset: ATR.
- On a Monthly basis, Sterling moves on average 500 pips from Open to High or from Open to Low (depending on the direction).
- It exceeds it’s 10-Month ATR 43% of the time.
- It moves between 80% and 100% of it’s 10-Month ATR 26% of the time.
- It moves up to 70% of it’s 10-Month ATR 84% of the time.
- On a Weekly basis, Sterling moves on average 200-300 pips from Open to High or from Open to Low (depending on the direction).
- It exceeds it’s 13-Week ATR 44% of the time.
- It moves between 80% and 100% of it’s 13-Week ATR 27% of the time.
- It moves up to 70% of it’s 13-Week ATR 84% of the time.
- On a Daily basis, Sterling moves on average 100-150 pips from Open to High or from Open to Low (depending on the direction).
- It exceeds it’s 20-Day ATR 41% of the time.
- It moves between 80% and 100% of it’s 20-Day ATR 24% of the time.
- It moves up to 70% of it’s 20-Day ATR 78% of the time.
Over to You
Whichever time horizon you focus on, there are at least a couple of ways to gauge how much space the currency pair could potentially move. The ATR is interesting because it’s adaptive: when the market moves less, it diminishes. When the market moves more, it increases.
But it’s certainly not the only way to measure “overdone” conditions. Get creative and get “intimate” with the data. Only by experimenting and working with the data first hand, can you really uncover timeless market dynamics.
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.