Forex trading market volatility continues to decline, and our range trading systems have made the most of smaller currency price moves. Yet recent market conditions have been far less kind to our trend-following and breakout trading algorithms. These systems look for one-sided sentiment extremes and latch on to nascent market trends. The utter lack of extended currency moves has made for extremely challenging trend trading conditions, and a general downtrend in volatility expectations gives little scope for noteworthy shifts in the currency market environment.
We have kept to our bias for Momentum trading systems for several weeks now, but that has clearly not worked out very well due to lackluster currency price moves. A general downtrend in volatility expectations gives us reason to believe that current conditions may persist through the near term, and we will accordingly shift our trading bias towards Range trades and more nimble Breakout trades. We will update our views on any significant shifts in market dynamics.
Recent market conditions have been especially challenging for trend-following Momentum1 and Momentum2 systems, while Range1 and Range2 systems have put in better performances on choppy price action. We have historically preferred higher-reward Momentum and Breakout systems, but it is clearly frustrating when currencies remain in small ranges for extended periods of time.
In our opinion, risk/reward almost always favors lower probability trend trades. Yet we cannot ignore that volatility expectations remain exceedingly low, and a steady succession of trend trade losses can frustrate even the most seasoned traders. Given such factors, we will favor Range1 and Range2 trades for the time being—treating Momentum and Breakout system trades with caution until we break out of key ranges.
[B]DailyFX+ Market Conditions Outlook[/B]
[B]NOTE: Data has once again been changed. Due to the ineffectiveness of the 30-day horizon, we are returning to the original 90-day time horizon. [/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 30 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]– 30-day closing high.
[B]Range Low[/B] – 30-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.
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