Euro Futures Analysis: October 2015

I spent some time this weekend analyzing the Euro futures market during October 2015. Here are some takeaways:

Price Action

The ultimate inspiration for this whole analysis was to become more efficient in trading Euro, both in time and capital exposure. Historically, I’ve watched intraday Euro moves non-stop from about 6am through 7pm. From 7pm until about 12am, I check-in periodically, and at 3am I get up to check for any moves on the European open or from overnight data. For the overwhelming majority of these hours, Euro does very little. Thus, my first goal is to be able to concentrate the hours I focus on Euro moves based on when significant moves have historically occurred and in accordance with any discernable trading patterns.

As a consequence of watching Euro moves and re-evaluating short-term targets nearly 24/5, I also end up maintaining unidirectional exposure 24/5, which is costly. As an example, after Friday’s massive NFP beat, Euro saw an immediate and significant drop. I profited handsomely from being long puts. However, I know these drops are typically retraced by ~50%, but I didn’t know when the retracement would occur and I didn’t want to blindly close the position. So I did what I nearly always do: I held tight in my position. Euro’s low for the day was set within the first minute of the initial drop. As a result, I ended up tying up a significant amount of capital for the entire day, while Euro only grinded higher against my short position. Thus, becoming more judicious in capital exposure, whereby, I can reduce exposure during low volatility/lightly traded time periods is the second goal.

To analyze price action moves, I used 1 minute OHLC data to calculate hourly price moves (close – open) for the entire trading month of October 2015. I segregated the data for positive and negative moves and averaged both sets.

The strongest positive moves occur at 7am and 2am. While the strength of the moves at 8am and 9am is sizably less, their temporal proximity to the 7am hour (strongest), paints a broader picture that the strongest positive moves generally occur between 7am-9am.

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Looking at the same data, hour-by-hour, it’s clear it’s not a coincidence the hours in which we see the largest positive price moves coincide with the hours the European markets are open. Thus, the major takeaway is that the optimal hours for positive price moves is between 2am and 10am, with a concentration on 7am-9am.

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Analyzing negative price moves yields similar, but slightly different results. 7am and 8am are also the hours with the first and third largest negative price movements. Yet, 1pm is the hour with the second largest negative price movement. This is interesting given that by 1pm, the European market has been closed for 1.5 hours. 6EPAorderedneg

Looking at the same data, hour-by-hour, we see a different pattern than in the positive moves, mainly in the outsized importance of the 1pm hour.

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Comparing the positive and negative data sets, we see that both the 2am hour and the time between the 7am and 8am hours are the periods associated with highest absolute change. In the negative price change data, we see that both the noon and 1pm hours have outsized price changes, relative to the positive price change data. This is likely a result of a melt up just after Europe closes at 11:30pm, and a resumption of the negative trend once the US lunch hour (between noon and 1pm) ends.

In summary, as far as price changes are concerned, the hours of 2am, 7am-9am and 1pm are of the most important to be actively engaged and exposed. The hours between 2pm and 6pm are relatively dead and could be the first place to lighten exposure and reduce attention.

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I took this analysis one step further and looked at the average change in price by hour, including both positive and negative changes. Here, strongly positive or negative average values are a result of either (1) a high frequency of similar directional prices changes within the hour or (2) a single “one-off” outsized move, coupled with relatively small positive and/or negative changes – meaning no real price change trend. Therefore, extreme values lend support for a pricing trend in that hour or a higher probability that large one-off price change events occur in that hour. To provide additional context, I’ve also calculated the frequency that a price change is negative in the hour.

2am, 8am, 9am and 1pm all have extreme average values. 9am has the lowest frequency of negative price changes and the largest positive average price change. 8am has the 2nd largest negative price change and the highest frequency of negative price changes. As described above, there’s likely a price trend or higher probability of outsized “one-off” price change in these hours. However, it’s important to keep in mind that even the extreme averages are still rather small, only 7 or 8 pips. That said, given that the 8am and 9am hours have extreme opposite averages, yet are adjacent in time, there’s an important reversal pattern here that traders should remain cognizant of. 6eavgpricemoveallhighlow

Traders should look to cover shorts/take profits from overnight declines through the end of the 8am hour and prior to the beginning of the 9am hour. Given the relatively large size of negative price changes vs. positive price changes in the 1pm hour, coupled with the fact that the largest absolute average price change also occurs during the 1pm hour, traders are advised to increase their exposure ahead of the 1pm hour.
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Volatility

One of the key shortcomings to the above price action analysis is that it only looks at the first and last trade of each hour and ignores everything that happened in between. (After posting these initial results, I’ll re-run the price action analysis on a rolling basis.) To overcome this shortcoming, I analyzed the intra-hour volatility by looking at the delta between each hour’s high and low with the goal of identifying time periods of extreme high and low volatility. Again, 2am, 7am, 8am, 9am, and 1pm ranked as the top 5 highest volatility hours.

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Looking at the same data hour-by-hour we see volatility first rises above the median during the 2am hour. Volatility stays elevated for the entirety of the European session, peaks during the 7am hour and finally recedes below the median during the 2pm hour. The major takeaways here are (1) during the 2am, 7am and 1pm hours, traders should be prepared for larger than usual price swings. While the average price changes were relatively small, only around 7 or 8 pips, we’ve seen price swings during these hours in excess of 40 pips! That’s a $500 move in a single /6E contract. (2) Volatility stays below the median from 2pm until 2am the following day. This suggests that traders should lighten exposure and pay relatively less attention to EUR moves between 2pm and 2am.

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Volume

Spot volume is very balanced throughout the day. Only two hours (12am and 6pm) had greater than 5% of average daily volume traded. These peak volume times correspond to the change in the calendar day and the change in the futures trading session. The 8pm hour has the lowest spot volume. Given the relatively equal distribution of volume throughout the day, and the unique events that occur during the two peak volume hours, the spot market’s hourly volume is a poor indicator for ascribing significance to price trends.

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Euro futures have significant 24/5 liquidity. Yet, futures volume is most concentrated between 7am and 9am and during the 2am hour. The 5pm hour has the lowest futures volume. Traders are advised to withdraw exposure between 2pm and 2am and instead look to enter trades at opportunistic prices arising from the combination of volatility and the time period’s relative reduced liquidity. 
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Summary

In summary, as far as price changes are concerned, the hours of 2am, 7am-9am and 1pm are of the most important to be actively engaged and exposed. During the 2am, 7am and 1pm hours, traders should be prepared for larger than usual price swings. Swings in excess of 40 pips aren’t unusual. Traders should look to cover shorts/take profits from overnight declines through the end of the 8am hour and prior to the beginning of the 9am hour. Given the relatively large size of negative price changes vs. positive price changes in the 1pm hour, coupled with the fact that the largest absolute average price change also occurs during the 1pm hour, traders are advised to increase their exposure ahead of the 1pm hour. The hours between 2pm and 6pm are relatively dead and could be the first place to lighten exposure and reduce attention. Volatility stays below the median from 2pm until 2am the following day. Traders are advised to withdraw exposure between 2pm and 2am and instead look to enter trades at opportunistic prices arising from the combination of overnight volatility and the time period’s relative reduced liquidity. 

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