Forex Margin Zones or How to Predict Price Movements
Hello, fellow traders and readers who are not indifferent to the topic of trading in the Forex market! After the publication of the article on Open Interest on currency options and futures, which described the trading strategy for analyzing the volume of positions in derivatives, the question arose about the margin zones in the comments.
The tactic is interesting in that it is based on real data and the characteristics of the currency futures market. It combines two methods of trading - based on short-term and medium-term analysis of resistance / support and breakdown levels. The latter term is unique, as is the trading tactic that defines the "zone of least resistance to the trend."
The article presents alternative material, without intersection with the strategies for using margin zones outlined on the Internet. The construction and operation of the levels is justified from the point of view of currency options traders on the Chicago CME.
Chicago - the center of "currency attraction" or the role of CME on Forex
The Forex market is decentralized, a common interbank platform registers and distributes transactions of institutional clients. The platform is designed to exchange large amounts of currencies, the volume of individual transactions is millions of dollars. Basically, legal entities trade on it, a private client can get to Forex through the intermediary of a bank, where for a minimum lot you need to pay from $ 100 thousand, while transactions are carried out with a minimum leverage.
Exchanges take a much lower margin deposit, allowing you to bring lots to the markets of $ 100 thousand, leaving only a few percent of their value.
Such positions cannot reach the interbank Forex market, in contrast to the hundred thousandth transactions of bank customers, where the leverage is covered by the real money of the financial institution. The exchange simply does not do this, trading "inside itself" with derivatives that replace the currency.
Before the appearance of Forex brokers, the first currency speculation took place inside the exchange platforms in the form of futures trading, the mechanism for the turnover of these derivatives is described in the article on Open Interest and vanilla options.
To date, currency derivatives are present on almost any national stock exchange, but the Chicago CME is considered the international trading center, the turnover of which reaches up to $ 90 billion per day (futures + options).
Considering that most of the contracts are deliverable, providing for real repayment in foreign currency at the expiration of the derivatives (expiration) term, it turns out that the Chicago exchange buys and sells up to 30% of the total turnover of the international Forex market against collateral and insurance of trades.
Such statistics allows traders to use various open data of the Chicago Stock Exchange on currency positions to analyze and forecast future trends, in particular, margin statistics.
Features of the foreign exchange margin on CME futures
Every forex trader knows that the amount of margin collateral depends on the leverage in the Forex market; if the size is 1 to 100, the broker holds 1% of the open lot size. If the position is transferred “overnight”, the trader may lose money (or earn) on the swap.
The Chicago Stock Exchange operates in a mode of double calculation of margin collateral, lowering the guarantee for a futures contract for the duration of the American sites and increasing 4 times for the medium-term open position.
This mode allows you to avoid the risks of default at the moment when the sites are closed, and therefore clearing is disabled. This is the process of tracking and covering the written short and long contracts with real currency, as well as the forced closure of futures on stop out.
On the exchange, it looks a little different than the Forex broker, - first the trader receives a margin call - the requirement to add funds to the account, and if the conditions are not met, the contracts are closed at the next opening of the session.
What are Forex Margin Zones?
Margin zones on Forex are called margin call levels established according to the short-term (intraday) and medium-term requirements of the CME exchange, which relate to positions transferred every other day.
They are calculated in points for each of the 10 traded currency pairs on the Chicago site. It is better to choose the pairs for which there are options - this is a matter of liquidity of the instruments and the ability to add additional filters to the strategy. We are talking about the strikes described in the article about vanilla options, where the maximum OI is located.
The margin value is taken from the futures specification on a daily basis, the amount of the collateral “floats” slightly, more serious changes in the guarantee coverage may indicate
- Upcoming holidays when exchanges are closed;
- Economic crisis - margin “bars” are growing due to the expected future volatility of trading, the exchange seeks to avoid a large number of margin calls.
Where to look and how to calculate the margin zone of a currency pair?
The specification of futures on the CME exchange website, in the "Trading" section, in the "FX" section, will help find marginal levels.
In the table that opens, select the currency pair that interests us, for example, Euro FX, corresponding to the EURUSD ticker. By default, all futures have a base in the form of the dollar USD, therefore, traditionally inverted Forex pairs are recorded here in a direct quote - JPYUSD, CHFUSD, etc.
Here you can find out the details of the specification of contracts, the margin is “hidden” under the option “Margins”:
We open it and see that for the right to trade one futures, we have to pay $ 2,000 in the medium term.
It is up to this size that the exchange raises guarantee coverage at the end of the session (2 a.m. Moscow time). The trader receives a margin call with a request to close the debt before the start of the next auction. If the shortage of funds is critical, the current position or part of it will be closed under the terms of a stop out.
The menu option (2) of the contract specifications will allow you to calculate the cost of full margin coverage points. Half of the item is valued by the exchange at $ 6.25, therefore, 1 pip = $ 12.5. Dividing the full guarantee coverage (in our case, $ 2000) by this number, we get 160 points.
This is our medium-term level of resistance and support, which determines the parameters of the maximum level of change in the exchange rate of a currency pair. It contains Sell Limit / Buy Limit counter-trend orders, which make it possible to earn on a rollback or a reversal of quotes.
Every day, the trader works with pending Buy Stop / Sell Stop orders at the “breakdown” levels, at the borders of the reduced guarantee, reduced by 4 times, i.e. equal in our case 40 pp.
How to build forex margin zones on a chart?
As mentioned above, the margin requirements for currency futures traded on the Chicago market are almost always the same and vary within 10%. These intervals are plotted on the pair chart after determining the medium-term resistance / support level. It turned out to be equal to 160 pp, to display the thickness of the zone you need to add + 16pp.
The levels are located symmetrically, above and below, the starting point of the expiration of the futures is every third Monday of the month. It is also the boundary of the cancellation of previous levels.
The dimension of the zone depends on the volatility of the market, in crisis conditions the ranges expand after the growth of guarantee coverage. The exchange insures the position of the trader and its security funds against default.
Rules for the construction of medium-term marginal zones
1. Medium-term marginal zones are built once a month, the starting point is every third Monday of the month (the opening price of the daily candle), since before that, on Friday, the previous monthly futures contract expires.
2. Follow the link to the CME website, set the CME exchange in the settings of the table that opens, the FX section in the window below, and select the pair of interest from the list of currency futures or set “All Products” to display the entire list of currencies.
We pay attention only to the lines with the name of the currency + future (euro future, canadian dollar futures, etc.). We select the nearest futures by the execution date, in this case 08/2019.
3. After clarifying the size of the margin, we will find out the value of the point (spread) and calculate the margin zone, as shown above.
4. We add 10% to the result, deferring the levels symmetrically to the reference point.
At the time of writing, the EURUSD margin is 160 pp + 16pp (10%), the starting point of the zones is July 15th.
Despite the static margin zone, it can be adjusted with increasing volatility of trading. For example, at the peak of the depreciation of the euro in 2014, guarantee coverage exceeded 180 pp.
A chart with weekly candles shows the development of signals of medium-term resistance and support in a critical situation. The trader manages to close the position on the rebound, even in a crisis.
As can be seen from the graph, such a long-term trade would allow entering the beginning of the trend and holding the deal, rearranging the stop at the upper resistance levels of margin zones.
Rules for building intraday margin levels
- The point of construction of intraday breakdown zones coincides with the opening of the CME exchange. Starting in March, during the summer period, it works from 18-00 to 2-00 Moscow time, after the last Sunday of October from 19-00 Moscow time;
- The exact number of points is considered as a medium-term margin (determined by the rule described above) divided by 4;
- Levels are laid off symmetrically up and down from the opening price of the first hourly candle, which coincides with the start of the Chicago stock exchange.
In the example with the EURUSD pair, after the start of trading at 18-00 we postpone 40 points below and above the beginning of the candle.
If quotes break through this zone, then in 80% of cases they will continue the trend further, giving the trader a sufficient "power reserve" to set a stop loss.
How do forex margin zones work?
Statistics of average Open Interest values, i.e. held positions in currency futures looks the same as with many other instruments - in the form of a bell. Derivatives are available three months before the expiration date, but the largest number of entries occurs a month before expiration.
This consideration justifies the choice of a mid-term reference point, there is no need for traders to choose the exact purchase or sale price, the position is hedged with the purchase of options. They are selected "around the edges" of guarantee coverage, such a choice determines the "cheap" cost of the option contract.
Due to the specifics of the strategy, futures are “covered” with a large number of options. These are delivery contracts that are converted into futures at the time of expiration.
When the exchange rate approaches any of the medium-term zones, the trader can cover the excess of options with new futures taken in the counter-trend, without worrying about stops. At the time of expiration, the positions will be offset and the profit received before the option contracts will cover losses on new futures.
Buying / selling futures “knocks down” the course in medium-term margin zones, new positions are invulnerable, since they have no stops, so the influx of counter-trend transactions is difficult to hit with an impulse.
Inside the day, the situation is different: due to high commission costs and short trading time, it is profitable for traders to sell rather than buy options. This position carries the risks of “limitless” losses, but for this, quotes must overcome 40 points in 8 working hours, which is quite rare. When this happens, traders have to urgently get out of positions, "hiding in the market."
The specifics of options is such that they are difficult to close due to non-linear changes in the price of supply and demand. It is faster and easier to purchase futures, only in this case it will be bought or sold in the direction of the trend.
Margin Level Trading Strategy
Currency pairs: EURUSD, GBPUSD, USDCHF, USDJPY, AUDUSD, NZDUSD, USDCAD
Timeframe: H1, D1
Trading time: medium-term option - any; short term - american session
Recommended brokers: Alpari, RoboForex, AMarkets
Medium-Term Strategy Rules
We determine and mark the medium-term marginal zones, as described above, setting aside levels above and below the opening price of the third Monday of the calendar month. We place pending orders Sell limit and Buy Limit in the middle of the zone border, adding 5% to the margin level.
In the future, the adjustment of the position of orders can only be in case of a change in the value of the margin. You can specify its size after the opening of the Chicago stock exchange at 18-00 Moscow time (in the winter at 19-00) on the site’s site.
We set the stop-loss equal to 100 pp, moving to breakeven after positive closing of the daily candle, which rebounded from the marginal level by 50 points or more. There is no take profit, the deal closes according to the expiration time of the futures.
Medium-term margin zones in 80% of cases (for the EURUSD pair) are reliably practiced for rebound. However, due to counter-trending tactics, a return to the trend and closing of the breakeven transaction are often carried out.
This is a signal that the margin zone will be broken, but the trader can re-enter, calculating the level of the maximum Open Interest (OI) options. As a rule, it is located nearby, as it is connected with futures by various option strategies.
It is also useful for traders to observe the change in the maximum OI level tied to a certain price of a currency pair (strike), any shift above the Sell Limit or below the Buy Limit may be an occasion to cancel a pending order.
Rules for a Short-Term Strategy
Before opening the Chicago stock exchange, we calculate the number of points of margin support for the currency futures and divide it by 4. These are the conditional boundaries of stops, the levels of which are postponed above and below the candle opening price at 18-00. On them, we set two “breakout” orders Sell Stop and Buy Stop.
After one of them is triggered, the second is canceled, and a stop loss is set at the opening price at 18-00, which is transferred to breakeven after the positive closing of the second hourly candle in the direction of breakdown (trend).
The transaction is held until 21-00 Moscow time in the absence of news on the calendar after this hour. If the position is in the red, take profit is set at the price of entering the position and is held until the end of the day.
Traders often complain about the unpredictability of the market, but careful observation of transaction statistics or price behavior can produce “predictable combinations”. The article clearly shows the existence of the zones of least and greatest resistance to the trend, which operate with a probability of 80%.
Combining the acquired knowledge with option levels or other varieties of resistance and support levels, you can get a fairly reliable strategy. By the way, one of these strategies has been working very successfully for some time on Alpari PAMM accounts. This was repeatedly written in quarterly reviews of the best managers in the Forex market.