- Euro tumbles following surprise Greek news, volatility almost guaranteed
- Forex volatility prices jump to their highest since “flash crash” of May, 2010
- Our strategy-trading bias unclear given extensive market uncertainty
The Euro looks almost certain to see significant volatility in the week ahead, and traders should keep an eye on these pairs given uncertainty surrounding Greece.
A surprise announcement from the Greek government on Friday sent the Euro significantly lower at Sunday’s open, and the resulting confusion makes further volatility exceedingly likely ahead of a planned referendum on Sunday, July 5.
FX options traders quickly sent Euro 1-week volatility prices to their highest levels in five years as markets opened on Sunday night, and indeed broader expectations point to potential turbulence in the week ahead.
Forex Volatility Prices Tumble after Big Week, but Greece Negotiations Represent Key Risk
Data source: Bloomberg, DailyFX Calculations
In many cases we would argue that the sharp jump in volatility prices might produce good market conditions for our volatility-friendly Breakout2 trading strategy. And yet the clear difficulty in this instance is that it is especially challenging to predict how markets will react to ongoing Greece-related headlines and the potential for a material market gap this coming weekend.
This isn’t to say there won’t be any trading opportunities ahead of the weekend’s referendum, but we would avoid outsized positions in the Euro—particularly against the safe-haven US Dollar, Japanese Yen, and Swiss Franc. Price action for the EUR/CHF is further complicated by the fact that the Swiss National Bank publicly announced it had intervened in order to protect against excessive CHF appreciation.
Expect more noise out of global central banks in what promises to be an eventful week for financial markets. Even beyond Greece, Thursday brings what is often the most-market-moving event in the US Nonfarm Payrolls report. It seems wise to keep risk tight ahead of a critical stretch for broader markets.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
Understand the Breakout2 Trading System via our previous article
Auto trade the trend reversal-trading Momentum2 system via our previous article.
Trade with strong trends via our Momentum1 Trading System
Use our counter-trend Range2 Trading system
--- 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.
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