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FUNDAMENTAL TRADING STRATEGIES

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FUNDAMENTAL TRADING STRATEGY: RISK REVERSALS Risk reversals are a useful fundamentals-based tool to add to your mix of indicators for trading. One of the weaknesses of currency trading is the lack of volume data and accurate indicators for gauging sentiment. The only publicly available report on positioning is the “Commitments of Traders” report published by the Commodity Futures Trading Commission, and even that is released with a three-day delay. A useful alternative is to use risk reversals, which are provided on a real-time basis on the Forex Capital Markets (FXCM) news plug-in, under Options. A risk reversal consists of a pair of options for the same currency (a call and a put). Based on put/call parity, far outof-the-money options (25 delta) with the same expiration and strike price should also have the same implied volatility. However, in reality this is not true. Sentiment is embedded in volatilities, which makes risk reversals a good tool to gauge market sentiment