A pronounced US Dollar downtrend has led to impressive gains across our trend-following trading systems, but persistently low volatility expectations limit scope for further USD weakness. Our forex options-based volatility indices trade near their lowest levels in over a year. Given the circumstances, we see comparatively little scope for extended US Dollar weakness and are adjusting our trading biases accordingly.
Predicting near-term forex market conditions is anything but an exact science, and challenging market environments have taught us to expect the unexpected. Low volatility expectations give us reason to favor Range Trading strategies. Yet these systems have underperformed through recent trade on continued US Dollar tumbles. With that in mind, we will continue to favor outperforming “Breakout” systems, while we will treat “Momentum” systems with a certain sense of caution until further notice.
[B]Forex Trading Automated Systems Outlook[/B]
[B]DailyFX+ System Trading Signals[/B]Breakout2, Momentum1, and Momentum2 were the top performers through the past week’s trade-benefiting greatly from extended US Dollar weakness. A late-week dollar reversal took away some earlier gains in the slow-moving Momentum1 strategy, but the shorter-term Momentum2 and Breakout2 systems actually flipped direction relatively quickly on the shifts in US Dollar sentiment. In terms of outlook, we will continue to favor the outperforming Breakout2 strategy. If nothing else, the strategy has shown its worth in producing accurate signals through varied market conditions. Momentum2 is likewise favored, but this system is susceptible to being chopped out if markets begin to range trade. Momentum1 is especially susceptible to range environments, and we will treat Momentum1 trades with some skepticism until further notice.
Range2 is another favored strategy in the week ahead. The key difficulty with this particular system is that it trades very infrequently. It uses a sentiment filter which takes it out of key currency pairs for extended periods of time-a factor that can be frustrating at times. Of course patience remains key, and the strategy will likely wait for more rangebound market conditions before entering trades worth our while.
[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]