Article - Rollovers And Short Covering the EUR/USD

Now let us turn to an active observation on how professional traders decided to take their profits during December 2014 trading the December contract EUR/USD.

Since May 2014 the EUR/USD futures contract had been in a 6 month price decline from its yearly high's in the 1.38 range towards the year end with the Eur/USD gently declining towards the 1.20 range.

Professional traders with long term shorts in the market entered around the mid 2014, were now at year end and were faced with 2 market choices:

1.  Close the profitable short position and book profits for the end of the year to square the books, and re-enter the short at a near future date when January 2015 trading resumes.

or

2.  Roll over the December 2014 contract to the March 2015 contract before the expiration of the December contract.

Now let us see the market action for December 2014 in the daily price chart below:

In this chart in the first week of December 2014 notice the upward mild bounce and increase in volume as traders chose to close out their shorts by purchasing a long entry to flat out the trade. This new demand for long entries created a rise in price. No fewer than 7 trading days suddenly saw the market closing with successive price highs on the daily chart due to this need for short covering to square the books. But in addition to short covering there was a lot of rollover action by ETFs and otherr funds holding currency investments.

Now remember what we spoke about when it comes to rule definitions in yesterday's article - 

 http://forexeducationperspective.blogspot.com/2015/01/article-rollover-and-expiration-dates.html

in that there's no hard and fast rule for a trader to adhere to rolling over his contract right at the end of the trading calendar and the final expiration date of the December contract. The right choice would be to follow the market liquidity and watch for the succeeding month daily volume for the March 15 contract come to parity with the December contract volume. That event shaped the first week of December where traders chose to rollover the contract.

Notice that after the 2nd week of December the phenomenon of profit taking and rollovers comes to an end and the market resumes its gentle decline to the 1.20 mark and lower in 2015.

Small time traders in the futures markets for currencies must always watch out for this phenomenon of rollovers and covering. Every March, June, September and December the astute trader will either hold out his position for the longer term price action and follow suit, close and rollover, or close out the the position for a quick reverse strategy trade to ride the rollover bounce and then re-enter with the original trend of a short.  In the case of the EUR/USD the trader would have closed the short position with a long to flat out, and then in true swing trading fashion, enter a quick long and then close out the long with a short, and then regain the original short direction when the rollover period has been consumed for the March 15 contract.

It remains to be seen how January will play out for the EUR/ USD particularly since the European central bank has decided to initiate a quantitive easing program similar to the US Fed. However, essentially for now the key supports against the tide of shorts can be found at 1.1640 (15/11/2005) and if that gives way then there is the 1.0765 (03/09/2003 low).


Pieter Bergli - DeLoren Trust Holdings

Forex education technical training

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