weekly strategy outlook

Forex Strategy Outlook: Volatility Likely to Remain Muted on Holiday-Shortened Week

Forex options markets predict relatively limited currency price moves in the week ahead, but elevated medium-term volatility expectations point to breakouts in the future. Our DailyFX 1-week Volatility index is at its lowest since August, 2008 ahead of the holiday-shortened week of trading. A busy week of economic event risk through Wednesday suggests we may see sharp moves through the very short-term, but later-week trade will likely see a pullback in short-term price swings. There is always danger that illiquid market conditions lead to unexpectedly sharp currency movements, but such price action seems somewhat unlikely given exceedingly low implied volatility levels.

Forex options markets predict relatively limited currency price moves in the week ahead, but elevated medium-term volatility expectations point to breakouts in the future. Our DailyFX 1-week Volatility index is at its lowest since August, 2008 ahead of the holiday-shortened week of trading. A busy week of economic event risk through Wednesday suggests we may see sharp moves through the very short-term, but later-week trade will likely see a pullback in short-term price swings. There is always danger that illiquid market conditions lead to unexpectedly sharp currency movements, but such price action seems somewhat unlikely given exceedingly low implied volatility levels.

 

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals Sharply volatile but essentially rangebound currency market price action has produced very challenging conditions for several of our most important trading strategies. Breakout2 has essentially had its worst run of weeks in recent memory, and we have unfortunately favored said strategy on robust currency volatility expectations. Our volatility percentiles across key US Dollar pairs remain well-above our 75 percent threshold, but it is critical to note that such percentiles are based on the currency's 3-month volatility expectations. It is with this in mind that we cautiously advocate Range trading through the coming week.

It will likely be a difficult week of unpredictable trading, and we advise that traders take special precaution to not over-leverage themselves through such unclear market conditions. It is especially worthwhile to note that illiquid holiday trading can and often does produce sharp and unexpected price moves-increasing the dangers of slippage on order entries and exits.

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.

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 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.

Range High –  90-day closing high.

Range Low  –  90-day closing low.

Last – Current market price.

Strategy – 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.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars