Strong Currency Volatility Favors Breakout Trading Strategies
Article Summary: Forex market volatility expectations remain high, and we continue to favor volatility-friendly breakout trading systems. Past performance is not indicative of future results, but these conditions have often coincided with outperformance in several of our sentiment-based trading strategies.
DailyFX PLUS System Trading Signals – A continued surge in forex market volatility leads us to believe that volatility-friendly trading strategies may continue to outperform through the coming week of trading. Past performance is not indicative of future results, but it is worth noting that several of our sentiment-based trading strategies have historically done well in times of such strong market moves.
Volatility remains especially elevated in Japanese Yen currency pairs as recent controversy over Japanese monetary policy gives reason to believe that the currency will see noteworthy price swings. The US Dollar (ticker: USDOLLAR) likewise eyes big moves as the Dow Jones FXCM Dollar Index may have hit a short-term reversal point as it hit fresh multi-year highs.
DailyFX Forex Volatility Indices
Our DailyFX Volatility Indices continue to trade near year-to-date highs and suggest overall markets will remain volatile. Said indices measure volatility expectations seen through FX options prices and serve as traders’ best guess as to how much markets will move within a specific stretch of time.
We use those same market prices to derive our “Volatility Percentile” figures in the table below. These percentiles compare current volatility expectations with the past 90 calendar days, and our statistical studies show that breakout-based trading strategies have historically done well when these figures have been above 75%.
Strong moves similarly warn against employing range trading-based strategies on the risk of significant breakouts in price.
View the table below to see our strategy preferences broken down by currency pair.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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Definitions
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.