DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
DailyFX PLUS System Trading Signals –Sharp Euro declines against the US Dollar (ticker: USDOLLAR) to start the week’s trade suggest that we could see further losses into the week ahead. Yet an important drop in forex options market volatility expectations limits the likelihood of major moves for the EURUSD and other major currency pairs.
Last week we warned that especially indecisive forex market conditions warned of sideways price action, and indeed we see many of the same risks going forward. The major fundamental issues for the Euro remain relevant as markets anticipate a key European summit at the weekend. All else remaining equal we would expect negative sentiment to keep downward pressure on the EURUSD. Yet indecision could force sharp intraday volatility within the broader downtrend.
Clear uncertainty across markets emphasizes the need for strong money management techniques amidst fast-changing market conditions. The sharp drop in market volatility limits our enthusiasm for our “Breakout Opportunities” and Breakout2 automated trading strategies, while broader trends are reasonably supportive of our “Trend Follower” and “Tidal Shift” systems (Momentum1 and Momentum2, respectively).
It could be another challenging week for market conditions, and caution is advised ahead of the weekend’s key European summit that threatens significant uncertainty across European currency pairs.
Forex options market volatility expectations have dropped noticeably on what is shaping up to be another week of challenging trading conditions. The DailyFX 3-Month Volatility Index is now below the psychologically significant 10% mark for the first time since early May. If this is indeed the start of lower volatility across the board, we will likely see price action slow down across the board and through often-directionless summer trading.
--- 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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