fundamental alert

Currency Trading Market Conditions Remain Challenging: Breakout Strategies Prove Profitable

Monday, 01 December 2008 14:17:27 GMT  |  David Rodriguez, Quantitative Analyst

Sharp US Dollar gains have produced profits in several of our currency trading strategies on the week, and a continuation of US Dollar strength would make for similarly profitable trading signals in the week ahead. The jump in forex market volatility through Sunday’s open benefited our Breakout and Momentum trading signals the most. Given that we previously favored Range trading signals, the surprise breakout reminds us that market conditions remain especially difficult to predict through current price action. Our preferred volatility and price-based forex indicators nonetheless continue to show us that many major pairs are likely to remain within their fairly wide trading ranges.

Our confidence in these forecasts is low, however, as we have clearly seen sharp breaks in otherwise monotonous trading conditions jeopardizing our Range-based system trades.

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals – Breakout2 and Breakout1 trading systems have been far and away the most successful through Sunday’s challenging forex market open, as big price breaks in US Dollar and Japanese Yen pairs left these trading signals in a particularly solid position to start the week’s trade. Yet we have yet to see signs that such gains will continue, and in fact our volatility indicators suggest that price action may slow in the week ahead. Many of our forex option implied volatility measures now trade at the low end of their 30-day range—a signal that options markets predict price action will quiet down through near-term trade. Of course, it serves to note that implied volatility levels remain extremely elevated by historical standards, and forecasting short-term trading conditions remains extremely difficult.

We maintain that major currency pairs will remain within their wide trading ranges through upcoming price action, and we will continue to favor longer-term Range1 trades and shorter-term Range2 signals. Yet recent price action has emphasized that volatility can return at any moment, and diversification across different trading systems may actually be the best strategy. We will update our stance on market conditions as price action dictates.

DailyFX+ Forex Market Conditions Outlook

NOTE: Methodology has been changed. Percentiles are now measured on a 30-day basis, down from 90 days previously.

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 30 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 30 trading-day range. A very low number tells us that price is currently at or near monthly 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 monthly range.
 
Range High –  30-day closing high.

Range Low  –  30-day closing low.

Last – Current market price.

Strategy – 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.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FOREX CAPITAL MARKETS, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FOREX CAPITAL MARKETS, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FOREX CAPITAL MARKETS, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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