Forex Strategy Outlook: Currency Volatility Drops, Range Strategies Become Attractive

Market Conditions Summary

Forex market volatility expectations have dropped considerably through the past week of trade, pointing to smaller currency moves in the weeks ahead. Increasingly choppy price action serves as clear reminder that we have entered summer trading, and few currencies have shown any signs of breaking well-established ranges. It is admittedly frustrating to establish clear strategy biases amidst such especially unpredictable price action. Due to relative illiquidity, market conditions can change in an instant and caution is advised against taking excess risk through the foreseeable future.

Given the sharp drop in volatility expectations, we will reluctantly shift our main strategy bias towards Range trading. Yet we will make little secret of the fact that we generally believe Breakout strategies offer superior risk/reward profiles.

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals –Our trend-following systems have seen a pullback through the past week of trade, as increasingly choppy price action has made it difficult to trade in the direction of short-term moves. Given the sharp drop in volatility expectations, we have little option but to shift our biases towards Range systems. Yet we’ve never hidden the fact that Breakout2 has been our perennial outperformer and stands to do well on any flare-ups in market tensions.

To gain a greater understanding of all six trading systems, view my recent presentation on DailyFX+ on our forex forums:

http://forexforums.dailyfx.com/david-rodriguez/215278-dailyfx-power-tools-trading-signals-technical-analyzer-david-rodriguez.html

DailyFX+ Forex Market Conditions Outlook

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.