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US Dollar Targets Fresh Highs as Volatility Surges

By , Quantitative Strategist
15 May 2012 16:00 GMT

The US Dollar (ticker: USDOLLAR) trades to fresh highs against the Euro and other forex counterparts, and high volatility expectations suggest the USD may continue to hit fresh highs (EURUSD lows).

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_trading_breakout_us_dollar_euro_signals_body_Cattura.png, US Dollar Targets Fresh Highs as Volatility Surges

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) has broken sharply higher against the Euro and other key counterparts, and the Dow Jones FXCM Dollar Index is currently challenging significant long-term trendline resistance. A simultaneous jump in forex options market volatility expectations suggests that this may be the start of much larger market moves, and indeed volatility-friendly Breakout strategies look attractive across the board.

Last week we favored of low-volatility range trading strategies, but market conditions have changed abruptly and we must change as well. Ongoing crises in the Euro Zone and Greece in particular leave the Euro at risk across the board. Indeed, we see fundamental reasons for which this may be the start of a much larger Euro breakdown.

In concrete terms this means that we favor DailyFX PLUS Trading Strategies “Breakout Opportunities” and “Tidal Shift”. Both systems stand to do well on strong price swings, and current volatility readings suggest market conditions will remain favorable.

Market Conditions:

Volatility expectations have broken out of their downtrend, and indeed it seems as though we may be entering a period of strong market moves. Our 3-month Volatility Index since February and March. A continued move would give us further confidence in our calls for high-volatility breakout trading.

forex_trading_breakout_us_dollar_euro_signals_body_Picture_2.png, US Dollar Targets Fresh Highs as Volatility Surges

--- 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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15 May 2012 16:00 GMT