Understand the Olsen Scale of Market Quakes – SMQ Charts

The Scale of Market Quakes (SMQ), created by Richard Olsen, co-founder of Oanda, is a measure that quantifies the impact of price events in the Currency Forex Markets. By measuring how big and how fast the prices of a market instrument moved by the time of a political and economic event, news release or natural disaster, the SMQ provides analysts with ways to compare how much such events have influenced trading decisions and the flow of market order executions.

As the Olsen SMQ calculation is based on the price evolution of a currency through time, any event causing a raise in the markets volatility can be indentified and set apart for further analysis. This makes it a valuable Fundamental and Technical Analysis tool capable of quantifying the impacts caused by news events, the placement of large orders, cascades of liquidations, and ubiquitous unbalances between buyers and sellers, for example.

Reading the Olsen Scale of Market Quakes Charts – SMQ

Let’s take as an example a SMQ chart of 2008 Jul 03 at 12:30 GMT, exactly at the release time of a basket of main economic events composed by:

ECB - Jean-Claude Trichet speech
USA – Initial and Continuing Job Claims reports
USA - NFP report (Non Farm Payrolls)
USA – Average Hourly Earnings reports
USA – Average Weekly Hours
USA – Unemployment Rate
USA – ISM Non Manufacturing

Figure 1: FxStreet.com Economic Calendar at 2008 Jul 03 (only events between 11:45 and 14:00 GMT)

The chart bellow shows the hourly EURUSD Forex spot prices at 2008 Jul 03 and on the two previous days. Note how the releases strongly pushed the EURO down by a relatively large amount.

Figure 2: EURUSD – Hourly Euro vs Dollar Forex spot prices at 2008 Jul 03

Looking at the Scale of Market Quakes chart, we can see that the release of those basket of news produced an average impact on the EURO equivalent to a SMQ value of 1.9, which is amongst the largest impacts the Euro have had during other NFP releases.

Figure 3: Average EURO SMQ Chart against main currencies at 2008 Jul 03 – 12:30 GMT

The currencies dissection on the left side SMQ radar shows that for the Euro, the largest impact caused by currency events at 12:30 GMT was against the Dollar (EUR/USD) and the Pound (EUR/GBP) while less pronounced movements where found on EUR/CHF and EUR/AUD.

Also note that the Olsen SMQ is produced with a 2 hour lag, and that SMQ peaks will be shown before the peaks on the currency charts. This way, although SMQ is calculated after the price movement, its measures are displayed before the end of the movement and approximately at the time of the event that caused the move in the markets.

To alleviate this 2h lag, a 1h estimate is also calculated and displayed in the chart. According to the article “The Scale of Market Quakes”, this estimation overshoots the final value by roughly 20% on average.

Olsen’s Intrinsic Time and the calculation of the Scale of Market Quakes

The Olsen Scale of Market Quakes is calculated based on the notion of Olsen’s Intrinsic Time. The Intrinsic Time is an alternative way of viewing the price evolution on trading markets were the time is measured from one price move overshoot (OS) to the next. Price overshoots are market with diamonds on the chart bellow:

Figure 4: Intrinsic Time: Directional Changes (DC) and Price Overshoots (OS)

For a intrinsic time point to occur, there must be enough movement against the previous prevailing trend to trigger a Directional Change Threshold (DC), where the DC is defined by a fixed percentage of the previous move. From this point onwards, the Price Overshoot (OS) starts to be counted until another Directional Change is triggered.

In the same way as we have different Timeframes and Tick Charts on conventional charting, we can have different Intrinsic Time charts by using different percentages as the Directional Change Threshold.

The Olsen Scale of Market Quakes takes the calculation of the Intrinsic Time one step further and, for each price movement in the market, the SMQ will measure how many DC thresholds, from 0.05% to 500%, would be be triggered, normalizing then the values into a scale from 0 to 6.

Because of that, big SMQ magnitudes will always correspond to big price price moves but, big price price moves may not always receive a big SMQ magnitude. If a big movement has developed in time as small and lengthy price swings, it may not trigger high enough DC thresholds thus not receiving a high SMQ magnitude value.

Comparing Market Impact with the Olsen Scale of Market Quakes
SMQ Charts

The charts bellow show the behaviour if EUR/USD during a series of NFP – Non Farm Payrolls releases from 2007 Aug 03 to 2009 Mar 03. By looking at the charts we can measure the impact that each NPF release had on the Euro and also compare how the SMQ magnitudes behave given different spot price responses to those events.