The recent bounce in the US Dollar has taken many of our trend-following forex trading signals by surprise, and in fact some strategies have now gone long the USD following a shift in market sentiment. Momentum and Breakout systems generally had a good run as they sold into US Dollar weakness, but recent turndowns in the EUR/USD suggest markets could return to their wide trading ranges. Especially low volatility expectations serve as further confirmation, and a quiet week of event risk may relegate major currencies to fairly lackluster price moves.
Though it is perhaps premature to completely shift towards Range-based trading systems, we should likely treat Momentum and Breakout trading systems with skepticism until we see a pickup in volatility expectations.
It remains important to monitor day-to-day price action in key currency pairs. Fresh lows in volatility expectations suggest that few anticipate major price moves through the medium term. Said drop really limits our optimism for Momentum and Breakout trading systems, but we cannot ignore the clear short-term trends in major currency pairs.
[B]Forex Trading Automated Systems Outlook[/B]
Generally strong performance in Momentum and Breakout systems came to an abrupt halt through the end of last week’s trading, as a sharp shift in US dollar trends saw systems give back some of their earlier gains. Momentum2 and Breakout2 most often outperform through times of clear continuation in US Dollar moves, and the more recent turnaround limits optimism for either strategy. Already we see that Momentum2 has flipped to short the Euro/US Dollar. Risk remains that the strategy gets shaken out on choppy price moves.
It remains critical to monitor US Dollar pairs through the near term and manage our trading biases accordingly. For the moment, we lean towards Range2 systems and, to a lesser extent, Breakout2 and Momentum2 trading signals. Yet we remain mindful that low volatility may in fact invite a turndown in currency movements and a return to trading ranges.
[B]DailyFX+ Forex 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 30 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] – 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.
[I]The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FOREX CAPITAL MARKETS, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FOREX CAPITAL MARKETS, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FOREX CAPITAL MARKETS, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.[/I]