Vantage FX (http://www.vantagefx.co.uk) look at off-chart indicators and how they can assist with your trading.
Off-Chart Indicators
Today we are looking at a EUR/USD futures chart from 2005 on a front month rolling basis.
We have plotted a futures volume histogram with a 10 period moving average volume. The pink line is the open interest on the futures contract, and below this we have the implied volatility on the puts (pink) and the calls (green). When the market is trending up, volume should be increasing as traders become increasingly confident in their views as they build positions, so the open interest should also be increasing.
Through 2006 and 2007 we can see that the average volume was increasing up to 2008 when prices started to come down. At the end of 2008 the implied volatility on the puts soared from 9% up to 30% as people desperately tried to buy protection to the down move. After a lull it picked up again in 2010 as the euro rallied from 1.20 to almost 1.50 - and again, we see increasing volume.
This week the implied volatility is back down to where it was pre-crisis. The pink puts are more expensive than the green calls on the Euro, except for this week where they've started to narrow together. The open interest has been increasing steadily since an interim low in early September, suggesting that some traders are adding to their long Euro positions. However the average volume is not backing this up, as it's flat.
This week for the first time the implied volatility on the calls is the same as the put prices. The puts have tumbled down from almost 10% to 7% today. Now we are looking at a one hourly chart, where we can see that if you get big volume on a tiny price range it means there's a big tussle between buyers and sellers, where you often get a Doji candlestick.
