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Forex Strategy Outlook: US Dollar to See Big Moves, Breakouts Favored

By , Quantitative Strategist
22 August 2011 17:30 GMT

Sharp currency moves are likely to bring further volatility into the week ahead, favoring fast-moving Breakout trading strategies until further notice.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_us_dollar_volatility_body_Picture_1.png, Forex Strategy Outlook: US Dollar to See Big Moves, Breakouts Favored

DailyFX+ System Trading SignalsIt was another solid week for our volatility-friendly Breakout2 strategy. And though Momentum1 and Momentum2 have seen strong gains on Swiss Franc pairs in recent weeks, impressively high volatility expectations favor Breakout2 going forward.

Such market conditions can and have produced exceedingly choppy and unpredictable currency swings, making our trend-following Momentum1 and Momentum2 less attractive. And though breakout strategies are typically prone to getting chopped out if currencies stick to wide ranges, the speed in entering and exiting positions often limits the damage. We would avoid Range1 and Range2 systems until price action slows.

forex_strategy_outlook_us_dollar_volatility_body_Picture_2.png, Forex Strategy Outlook: US Dollar to See Big Moves, Breakouts Favored

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.

Volatility expectations have consolidated since registering fresh twelve-month highs through the past several weeks, but elevated levels continue to favor sharp moves in the days ahead. It’s possible that we have set a peak for volatility expectations, but it is important to note that the S&P 500 Volatility Index (VIX) continues to trade near its highest levels since the height of the financial crisis of 2008-2009. There’s considerable risk that FX volatility will remain elevated amid broader financial market tensions.

forex_strategy_outlook_us_dollar_volatility_body_Picture_3.png, Forex Strategy Outlook: US Dollar to See Big Moves, Breakouts Favored

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

To be added to this author’s distribution list, send an e-mail subject line “Distribution list” to drodriguez@dailyfx.com

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.

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.

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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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22 August 2011 17:30 GMT