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Breakout Trading Remains Top Strategy as US Dollar Surges

By , Quantitative Strategist
25 February 2013 15:00 GMT

Article Summary: Surges in forex volatility leaves us in favor of our volatility-friendly sentiment-based trading strategies as the US Dollar (ticker: USDOLLAR) has rallied for 6 consecutive weeks.

DailyFX PLUS System Trading Signals A continued surge in forex market volatility leaves us plainly in favor of high-volatility Breakout-trading strategies, and current market conditions continue to favor major moves across the board. The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) trades at multi-year peaks, and the safe-haven US currency seems is now working on its seventh-consecutive week of strength.

Automate our high-volatility breakout trading system.

forex_strategy_favors_us_dollar_strength_body_1a.png, Breakout Trading Remains Top Strategy as US Dollar Surges

Past performance is not indicative of future results, but our breakout and trend-based sentiment-based trading strategies have historically done well in similar market conditions. Dollar volatility seems especially likely against the fast-falling British Pound, while continued breakdowns in the Japanese Yen warn of further weakness.

DailyFX Forex Volatility Indices

forex_strategy_favors_us_dollar_strength_body_Picture_2.png, Breakout Trading Remains Top Strategy as US Dollar Surges

Our DailyFX Volatility Indices trade at significant peaks as FX options traders bet on strong currency moves across the board. Volatility expectations are now at their highest levels since Euro Zone crises hit fever pitch in June/July of last year. Of course it’s important to note that expectations are still low by historical standards.

Volatility tends to cluster; if last week was volatile, there is a strong likelihood that this week will be similar. Thus we expect that strong moves may continue through the foreseeable future until we have concrete signs of market calm.

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_favors_us_dollar_strength_body_Picture_3.png, Breakout Trading Remains Top Strategy as US Dollar Surges

--- 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.

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25 February 2013 15:00 GMT