Forex Strategy Outlook: US Dollar Weakness Favors Trend Trading

Market Conditions Summary

Continued declines in forex options market volatility expectations suggest that major currencies could stick to relatively tight trading ranges in the week ahead.

The past week of unpredictable and fast-shifting price action made for a mixed week of performance from our DailyFX+ trading signals and benchmark trading systems alike. Breakout and Momentum systems generally benefited from noteworthy US Dollar weakness, and a continued downtrend would likely favor Momentum systems going forward. Outlook for Breakout strategies is more nuanced; while said systems would likely pick up gains on continued USD weakness, they tend to underperform through times of lower market volatility. We will reluctantly move Breakout systems to “Underweight” and treat them with a sense of skepticism amidst low volatility expectations..

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals – None of our six trading strategies had a particularly notable week of gains or losses, and overall performance was exactly average on shifting market conditions. Continued US Dollar weakness would nonetheless favor Momentum2, which remains heavily net-short the USD amidst a noteworthy shift in short-term sentiment. Momentum1 is a trickier proposition given that said system tends to do well amidst the longer-term trends and is liable to get chopped out on sudden shifts. Given low volatility expectations, extended trends seem somewhat less likely. Said conditions likewise favor Range2 trades in the days ahead. We will treat Breakout2 trades with a certain degree of skepticism on low market volatility.

To gain a greater understanding of all six trading systems, view my recent presentation on SSI and the trading signals on our FXCM Digital Expo page.

Benchmark Trading Systems

Data and Backtest Results Generated using FXCM Strategy Trader

Benchmark Range, Trend, and Breakout strategies saw quite mixed performance through the past seven days, and unclear forecasts make it admittedly difficult to favor any one strategy for the week ahead.

DailyFX Individual Currency Pair Conditions Summary

Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com

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Definitions

Range Strategy – The benchmark range trading system shows the hypothetical performance of a simple Relative Strength Index strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It sells when the 14-period RSI falls below 70 and buys when it crosses above 30. No other trading rules are used. Hypothetical results are generated using FXCM Strategy Trader.

Trend Strategy – The benchmark trend trading system shows the hypothetical performance of a simple Moving Average Crossover strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It buys the currency pair when the 50-period Simple Moving Average crosses above the 100-period and 200-period averages. It sells when the 50-period crosses below the 100-period and 200-period averages. No other trading rules are used.

Breakout Strategy – The benchmark breakout trading system shows the hypothetical performance of a simple Channel Breakout strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It will set a buy order at the highest high of the previous 20 bars plus one pip and a sell order at the lowest low of the previous 20 bars minus one pip. No other trading rules are used.

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.

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.