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Trade Update - Breakout Trading Now Attractive in Key FX Pairs

By , Quantitative Strategist
28 August 2013 16:00 GMT

Article Summary: A sharp jump in forex volatility prices suggests the US Dollar may soon break out of its recent range—here’s how we’re looking to trade it.

DailyFX PLUS System Trading Signals A noteworthy jump in volatility has shifted our FX trading biases in key US Dollar pairs.

On Monday we wrote that we remained mostly in “wait and see” mode on the US Dollar as low volatility and tight trading ranges meant the next Greenback move was unclear.

Yet we’ve seen forex vols bounce noticeably and this may be the start of the move we’ve expected.

Forex Volatility Prices Have Bounced Noticeably off of Recent Lows

forex_trade_update_us_dollar_breakout_trading_body_Picture_1.png, Trade Update - Breakout Trading Now Attractive in Key FX Pairs

Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations

If you’ve never followed along with our sentiment-based trading systems, you can view this video to find out more about automating our proprietary strategies.

Regular viewers will note that our strategy biases (see table below) on the Australian Dollar and other pairs have shifted on the sudden bounce in volatility, and indeed we now think the Breakout2 strategy is now attractive.

For other pairs we’ll stick to what has worked as of late, but a bigger move in vols would make us change our biases on other US Dollar pairs as well. Sign up for e-mail updates via my distribution list for any updates.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_trade_update_us_dollar_breakout_trading_body_Picture_2.png, Trade Update - Breakout Trading Now Attractive in Key FX Pairsforex_trade_update_us_dollar_breakout_trading_body_Picture_3.png, Trade Update - Breakout Trading Now Attractive in Key FX Pairs

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--- 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.

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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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28 August 2013 16:00 GMT