Forex Strategy Outlook: Currencies Likely to Remain in Ranges

Choppy forex markets and a considerable drop in forex options volatility expectations leave little scope for a sustained US Dollar breakout or trend—suggesting that the Euro/US Dollar may stick to its long-standing trading range. Our 1-week FX Options volatility index is now near its lowest since late 2008, and few traders are gearing up for big currency moves. We may look to avoid trend-trading and instead concentrate on short-term currency ranges.

Choppy forex markets and a considerable drop in forex options volatility expectations leave little scope for a sustained US Dollar breakout or trend—suggesting that the Euro/US Dollar may stick to its long-standing trading range. Our 1-week FX Options volatility index is now near its lowest since late 2008, and few traders are gearing up for big currency moves. We may look to avoid trend-trading and instead concentrate on short-term currency ranges.

We have shifted our bias towards a more low-volatility “Range” and away from “Momentum” trading, as our trend-trading strategies have suffered on recently directionless price action. A trend-trading strategy typically waits until price moves extensively in one direction before establishing a position. This works in situations when price continues in that direction, but that has hardly been the case as of late. Intraday volatility has meant that our “Breakout” strategies have fared better than our longer-term “Momentum” systems, but again, choppy price action leaves these price-following trades at risk. We cautiously prefer “Range” systems in the week ahead.

[B]Forex Trading Automated Systems Outlook[/B]

[B]DailyFX+ System Trading Signals[/B]– Trend-following Momentum1 and Momentum2 strategies have had a tough time of it through the past couple weeks’ trade, as extremely indecisive markets have effectively “chopped out” key systems. Range1 and Range2 strategies should have been top performers, but the latter has filters that keep it out of fast-moving markets. As price action slows down, we may see Range2 take more positions. The sharp drop in volatility expectations leaves us bullish Range2.

Breakout2 is likewise a preferred strategy in the week ahead. If nothing else, the system has shown its resilience in the face of unpredictable market conditions and has won our respect. A mix of Breakout and Range strategies could produce a winning combination in uncertain times.

[B]DailyFX+ Forex Market Conditions Outlook[/B]

[B]Definitions[/B]

[B]Volatility Percentile[/B] – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

[B]Trend [/B]– This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near monthly lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s monthly range.

[B]Range High[/B] – 90-day closing high.

[B]Range Low [/B] – 90-day closing low.

[B]Last [/B]– Current market price.

[B]Strategy [/B]– Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.
OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.

[B]Written by David Rodriguez, Quantitative Strategist for DailyFX.com[/B]