The Euro rallied sharply against the US Dollar (ticker: USDOLLAR) on the announcement of a bailout for Spain, but the swift reversal emphasizes that risks remain for EURUSD losses and we favor volatility-friendly trading strategies.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
DailyFX PLUS System Trading Signals –A sharp Euro bounce and US Dollar (ticker: USDOLLAR) decline on Sunday’s open hurt the performance of several of our trend-following trading systems. Yet that Spanish bailout-fueled relief rally quickly faded, and a surge in volatility expectations leaves our previous USD-bullish bias intact.
Our one-week DailyFX Volatility Index is now at its highest levels all year, and sharp currency moves look likely to continue. Given this backdrop, we expect the safe-haven US Dollar to do well against the Euro, Australian Dollar, and other risky counterparts given strong forex correlations against bellwethers such as the US S&P 500, German DAX, and broader asset classes.
Our strategy bias remains unchanged since last week when we favored the volatility-friendly “Breakout Opportunities” (Breakout2) strategy as well trend-following systems. Our forex sentiment-based strategies saw one of their best single periods of performance in recent memory through the month of May. And though June has started off on a much weaker note, we believe that market conditions favor volatility-friendly strategies.
Past performance is not indicative of future results, but our “Traits of Successful Traders” series underlines the importance of picking the right trading strategy in specific market conditions. That said, even the right strategy in appropriate market conditions can easily produce losses. Strong money management techniques become critical during fast-changing market conditions, and recent experience only serves to emphasize that point.
Our 1-week DailyFX Volatility Index is now at its highest levels of the year as traders react to sharp moves following announcements that Spain will receive a bailout worth up to 100 billion Euros. Traders clearly predict strong moves given heightened uncertainty surrounding Spain and the Euro Zone. We see scope for further US Dollar strength as it remains the world’s benchmark safe-haven currency.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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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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