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Forex Strategy: Japanese Yen Volatility Favors Breakout Trading

By , Quantitative Strategist
28 January 2013 15:00 GMT

Article Summary: Important forex volatility in the Japanese Yen, Australian Dollar, and Canadian Dollar leaves us in favor of volatility-friendly breakout trading strategies. Past performance is not indicative of future results, but such market conditions have generally coincided with outperformance in several of our sentiment-based trading strategies.

DailyFX PLUS System Trading Signals Impressive Japanese Yen volatility continues to offer strong trading opportunities, and our sentiment-based trading strategies have performed fairly well through noteworthy moves. FX Options traders predict that JPY pairs will remain quite active in the week ahead, and we believe that our volatility-friendly “Breakout Opportunities/Breakout2” system may continue to do well trading the USDJPY, EURJPY, and others.

Recently-sharp moves in the Canadian Dollar and Australian Dollar may likewise offer similar opportunities going forward—particularly as both seem likely to break fresh lows versus the US Dollar.

DailyFX Forex Volatility Indices

forex_strategy_outlook_japanese_yen_volatility_body_Picture_1.png, Forex Strategy: Japanese Yen Volatility Favors Breakout Trading

Our volatility percentiles (shown in the table below) are almost all near 100%; forex options traders predict that volatility will be the highest it has been in at least 90 days.

Past performance is not indicative of future results, but such highs in these options implied volatility-based indicators often coincide with outperformance in volatility-friendly strategies. Strong moves similarly warn against employing range trading-based strategies on the risk of significant breakouts in price.

View the table below to see our strategy preferences broken down by currency pair.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_japanese_yen_volatility_body_Picture_2.png, Forex Strategy: Japanese Yen Volatility Favors Breakout Trading

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

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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 90-day 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 90-day 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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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28 January 2013 15:00 GMT