Currency Volatility Favors US Dollar Breakout Trading
David Rodriguez
Article Summary: High forex volatility leaves us plainly in favor of breakout and trend trading, and we believe several of our sentiment-based trading strategies may outperform in the week ahead.
DailyFX PLUS System Trading Signals – Forex volatility continues to trade near multi-year peaks, and strong currency moves leaves us plainly in favor of volatility-friendly trading strategies until further notice. Given the fact that the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) continues to trade to fresh multi-year highs, high volatility likewise leaves us in favor of continued USD strength.
The Dollar Index has now rallied for five consecutive weeks amidst the resurgence in FX market vols, and several of our sentiment-based trading strategies have likewise done well in these market conditions. Past performance is not indicative of future results, but we see reason to believe that recent results bode well for near-term performance across several key strategies.
DailyFX Forex Volatility Indices
forex_strategy_favors_breakout_trading_body_Picture_1.png, Currency Volatility Favors US Dollar Breakout Trading
Our DailyFX Volatility Indices continue to hit fresh highs as FX options traders bet on strong currency moves. A series of higher lows and higher highs suggests that we may have seen an important turn in overall currency market regimes. In short: 2012 was marked by continued contraction in vols and general underperformance in many popular FX trading strategies.
If this is truly ‘the turn’, we might expect 2013 to prove far friendlier to many of our trend and breakout-following automated trading strategies.
View the table below to see our strategy preferences broken down by currency pair.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
forex_strategy_favors_breakout_trading_body_Picture_2.png, Currency Volatility Favors US Dollar Breakout Trading
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
Volatility Percentile – 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.
Trend – 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 90-day 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 90-day range.
Range High – 90-day closing high.
Range Low – 90-day closing low.
Last – Current market price.
Bias – 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.
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