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Euro Offers Long Opportunity versus Dollar as Markets Range-bound

By , Quantitative Strategist
07 May 2012 16:00 GMT

The US Dollar (ticker: USDOLLAR) rallied sharply against the Euro to start the week’s trade, but low volatility suggests that the Euro/US Dollar remains an attractive range trade long against the overnight lows.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_us_dollar_body_Picture_1.png, Euro Offers Long Opportunity versus Dollar as Markets Range-bound

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) started the week sharply higher across the board, but an abrupt reversal at important resistance suggests it may stick to its multi-month trading range against the Euro and other key counterparts. What does this mean for our own trading strategies? We like trading the EURUSD higher off of overnight lows of $1.2954.

More broadly, range trading strategies such as “Congestion Opportunities” and Range2 on the DailyFX PLUS Trading Signals page look attractive on low likelihood of major breakouts.

We will stay away from the opposite end of the spectrum—“Breakout Opportunities” and Breakout2 systems—unless the situation changes. Our research shows that breakout trading strategies tend to underperform when our volatility percentiles fall to fresh lows. This leaves us favoring slower-moving range and trend trading systems until further notice.

Market Conditions:

Volatility expectations continue near their lowest levels since the onset of the financial crisis, and the weekend’s developments have been unable to change that.

Until we see a significant shift in trader sentiment, we see little choice but to favor strategies that have historically done well in times of slower market moves. Past performance is not indicative of future results, but history remains in our favor as we see low volatility favors range trading.

forex_strategy_outlook_us_dollar_body_Picture_2.png, Euro Offers Long Opportunity versus Dollar as Markets Range-bound

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, 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.

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.

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07 May 2012 16:00 GMT