Currency Trading markets have settled into broad trading ranges once again, and a clear drop in currency option implied volatility levels signals that traders expect few major moves through the coming months. Our 3-month Implied Volatility measure now trades at its lowest since February, and exactly zero of our 18 pairs currently stand in “Breakout” territory. It is subsequently little surprise that we would favor low-volatility strategies through the coming weeks—selling at strong resistance and buying at similar support levels.
Preferred Strategies
Given the likelihood of Rangebound and directionless currency price action, we prefer trading strategies such as Jamie Saettele’s “Picking Tops and Bottoms” report through the short term. The difficult-to-define strategy has performed admirably through recent weeks of inconsistent price action, and we feel that it can only improve as markets are more likely to set short-term tops and bottoms. The “Pairs to Range Trade” report likewise should outperform in seemingly tailor-made market conditions, but the strategy has little performance upon which to base future expectations for future profits. Finally, our Speculative Sentiment Index trading signals may underperform as the contrarian trading strategy tends to do its best in strongly trending markets.
Discretionary Strategy Outlook
[B]Picking Tops and Bottoms[/B] – This difficult-to-classify strategy has performed well as of late, and we see little reason to remove it from our “Preferred” position on our weekly outlook report. The prospects of Rangebound markets ostensibly increase the likelihood of short-term Tops and Bottoms, and we will trade accordingly.
[B]Pairs to Range Trade[/B] – Rangebound markets should improve the profitability of our “Pairs to Range Trade”, but the strategy’s recent underperformance decreases confidence in its ability to outperform in seemingly favorable market conditions. Keep an eye out for good range setups, but as always use your own discretion in picking promising trades.
[B]Speculative Sentiment Index Trading Signals[/B] – Our Speculative Sentiment Index trading signals have underperformed as of late, as the contrarian strategy tends to perform best in clearly trending markets. We recommend underweighting exposure to SSI signals until we see a clear shift in our current range trading bias.
Systems Outlook
[B]Dynamic Carry Trade Basket[/B] – Please see our weekly report on Carry Trades for a better idea on what to expect through short-term trade: A Sharp Reversal Threatens the Rebound in Carry Trade in Risk Appetite.
[B]Technical Analyzer and Signals from Thomson IFR[/B] – Use own discretion to filter through IFR or Technical Analyzer signals in the week ahead.
Chart Definitions
[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 calendar year 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 calendar-year range.
[B]Trend[/B] – This indicator measures trend intensity by telling us where price stands in relation to its 52-week range. A very low number tells us that price is currently at or near yearly 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 annual range.[I]
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