Up until now our tactical comparisons of the EUR and FXE have consistently favored trading EUR. But, before we close the book on that, here are three EUR risk considerations that bear close attention: lack of transparency, short term volatility and dynamic bid-ask spread.
The first problem with FX is the lack of a central exchange, so it’s difficult to monitor true volume on a minute by minute basis. This lack of transparency can open the door for some bid-ask shenanigans that can produce some real Prozac moments when HFT programs are triggered by apparent breakouts. A case in point is shown above on 5 minute bars. At &;35 the EUR jumps 57 pips in 5 minutes, followed by a 34 pip up bar for a total of 89 pips. This was a fairly predictable move . . a retest of the 1.3040 previous high. What wasn’t anticipated was the flash move, which undoubtedly triggered a slug of bullish straddles. Now the fun: Over the next 25 minutes the EUR plummets 111 pips, at one point dropping 140 pips on a poop and scoop bar. But wait, the fun’s not over yet as the EUR then jumps up 65 pips in the next 15 minutes to meet the US market open with the same price as evident at 3:00 . . our Dipper trigger. Meanwhile, while the EUR was swaying like a crack head the bid-ask spread (on my platform) opened to over 11 pips at several times, in contrast to the usual 2 pip spread. That’s plenty of incentive to discourage many traders, including myself, from trading the surge as the reasonable expectation should be that an exhaustion bar can’t be far away and the last you want is to caught on the wrong side of the slide with a 10 pip spread.
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