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Dollar Breakdown Offers Attractive Trade Opportunities

By , Quantitative Strategist
18 October 2013 15:00 GMT

- US Dollar breaks to fresh lows versus Euro, DJ FXCM Dollar Index at support

- Our sentiment-based trading strategies look attractive as Dollar trends lower

- Low forex volatility looks likely to continue, favoring Greenback weakness

The Dow Jones FXCM Dollar Index has registered its 3rd-largest daily decline of the year and has broken sharply below its 200-day Simple Moving Average. All the while, retail sentiment leaves us in favor of continued USD weakness and sharp declines in US interest rates aren’t helping.

Given risks of further Dollar weakness, how and when might we trade?

Our automated sentiment-based trading strategies have sold aggressively into USD weakness and offer a method by which to trade into the Dollar downtrend.

One caveat is that these systems have historically done better in periods of high forex market volatility. Our DailyFX Volatility Indices are at their lowest levels since January—showing that traders expect slow market moves ahead.

Forex Volatility Prices Continue to Tumble, Favoring Slow-Moving Markets

forex_strategy_trading_US_Dollar_Forecast_to_Fall_Further_body_Picture_1.png, Dollar Breakdown Offers Attractive Trade Opportunities

Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations

Our preference remains to trade with our trend-following Momentum2 trading strategy until further notice. It’s certainly possible that low-volatility conditions could mean that the US Dollar fails to hit further lows. Yet we likewise note that the safe-haven US currency tends to do poorly as vols decline.

Our strategy trading biases are listed in full detail in the table below. Sign up for e-mail updates via my distribution list for any changes to our biases.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_trading_US_Dollar_Forecast_to_Fall_Further_body_Picture_2.png, Dollar Breakdown Offers Attractive Trade Opportunities forex_strategy_trading_US_Dollar_Forecast_to_Fall_Further_body_Picture_3.png, Dollar Breakdown Offers Attractive Trade Opportunities

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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.

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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18 October 2013 15:00 GMT