A sudden drop in forex market volatility expectations suggests that major currencies may revert to range trading in the week ahead. Implied volatility on forex options rose considerably on sharp US Dollar price moves and ahead of the infamous US Nonfarm Payrolls report. Now that NFPs have come and gone, our DailyFX 1-Week Volatility Index now trades near its lowest in over a year. Such subdued volatility indicators give us little reason to expect major shifts and breakouts, and indeed we will position ourselves for smaller price moves through our trading system selection.
The US Dollar is trading considerably lower to start the week’s trade, but this has tellingly failed to boost short-term volatility expectations. Given that the Greenback now trades near the bottom of its recent trading range against key counterparts, subdued implied volatility suggests that further breakdowns are somewhat unlikely. With this in mind we’ve shifted our main bias towards Range-based systems, but our Breakout strategies’ recent resilience suggests it may survive despite small price moves.
[B]Forex Trading Automated Systems Outlook[/B]
[B]DailyFX+ System Trading Signals[/B]Our trading strategies had a fairly mixed week of performance, with fast-shifting market trends and conditions creating difficult conditions for any one strategy to excel. If anything, the Range2 system should have done the best through choppy price action; yet extreme SSI ratios prevented the system from entering into many trading opportunities. Given low volatility expectations, it stands to reason that Range2 should be a preferred strategy on limited scope for price breakouts. Yet the strategy has traded very little as of late, and we hope that it will become more active in the week ahead.
[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]