Forex Strategy Outlook: US Dollar Reversal Critical

A strong US Dollar reversal led many of our trend-following trading strategies to close USD-short positions, and indeed the shift has prompted some systems to go long the US currency. Friday’s Nonfarm Payrolls sparked the long-overdue bounce that picked the USD off its lows. The question now becomes whether we can expect a more sustained US Dollar rally.

Our bias towards “Momentum” and “Breakout” systems brought mixed results through last week’s trade. We clearly benefited when the EURUSD and GBPUSD rallied to fresh year-to-date peaks–Momentum1, Momentum2, and Breakout2 all floated sizeable gains on the US Dollar breakdown. Yet the reversal quickly pulled us out of said positions, and the slow-moving Momentum1 strategy gave up most of its previous gains. We are admittedly torn in establishing trading biases for the week ahead.

On the one hand, we had called for a sustained US Dollar reversal on extremely one-sided market positioning. On the other, forex options implied volatility levels show few expect sustained price moves. Given our own indecision, we will leave our previous trading bias intact, but we admittedly have little conviction or confidence in these calls.

[B]DailyFX+ Market Conditions Outlook[/B]

Momentum2 and Breakout2 systems saw noteworthy gains through early-week price action, but the subsequent US Dollar reversal clearly worked against the trend-following systems. Momentum1 was hit especially hard with choppy USD moves; the strategy tends to set fairly wide stops and does not quickly shift direction on reversals. Indeed, it is best-suited for longer-term trends and generally does poorly until currencies make extended directional moves.

With this in mind, we will treat Momentum1 trades with a certain degree of skepticism until we see scope for sustained forex market trending conditions. The faster-moving Momentum2 and Breakout2 could continue to benefit from short-term volatility.

[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 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.