Currency trading markets are primed for trend trading through the medium term, as the vast majority of forex pairs are in the midst of extended medium-term price trends. Of the 18 currency pairs we cover for this report, 14 are in “Trend” territory, three are under “Range”, and only one (the Australian Dollar) is in “Breakout” ranges. Three major central bank decisions have come and gone, and currency options traders are now geared up for depressed forex volatility through the short term. We will favor trading strategies that do best in trending currency markets, placing less weight on Range trading and high-volatility breakout trades.
Preferred Strategies
Our medium term trading bias has shifted in favor of a clear market trending bias, and we will pay close attention to FXCM Speculative Sentiment Index trading signals—outperformers in prolonged currency price moves. A close second in this regard is Jamie Saettele’s “Picking Tops and Bottoms” report, which has been one of our most profitable strategies over its lifetime. A distant third is our “Pairs to Range Trade” report, which has been performing poorly as of late in relatively unfavorable market conditions.
Discretionary Strategy Outlook
Speculative Sentiment Index Trading Signals – Our Speculative Sentiment Index trading signals have seen clear improvement as of late, as major currencies have embarked on fairly extended trends. Trading the SSI typically is most effective during strongly trending markets, and the prospect of continued price trends bodes well for these signals. Visit our Forex Trader Sentiment and Positioning Thread on the FX Forum to discuss these signals.
Picking Tops and Bottoms – This difficult-to-classify strategy has performed well as of late, and we see little reason to shift our bias away from these trades. Anecdotally, times of highly volatile ranging markets have produced poor results in these trades, while low-volatility trends will tend to improve the performance of these currency trading signals. View Jamie Saettele’s most recent Forex Trading Signal Following the Fed Rate Decision.
Pairs to Range Trade – Major currencies continue to break out of their medium term trading ranges, and we would advise against placing too much weight on range trading strategies. The typical high-risk/low-reward range trade tends to underperform in strongly trending markets.
Systems Outlook
Dynamic Carry Trade Basket – Please see our weekly report on Carry Trades for a better idea on what to expect through short-term trade: Forex Carry Trade Range May Not Last
Technical Analyzer and Signals from Thomson IFR – Use own discretion to filter through IFR or Technical Analyzer signals in the week ahead.
Chart Definitions
Volatility Percentile – 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 three months 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.
Trend – This indicator measures trend intensity by telling us where price stands in relation to its three-month range. A very low number tells us that price is currently at or near quarterly 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 quarterly range.
[B]Written by David Rodriguez, Quantitative Analyst for DailyFX.com.
We love hearing from readers. To contact the author of this report, e-mail <[email protected]>.[/B]