fundamental alert

Forex Trading Signals Profit on Japanese Yen Strength - What's Next?

Monday, 12 January 2009 14:58:29 GMT  |  David Rodriguez, Quantitative Analyst

Currency trading markets have started the New Year with a bang, as the US Dollar has already carved out major moves against the Euro and other key counterparts. The sudden jump in volatility has largely benefited our Breakout and Momentum-based trading signals, as our strategies have largely bought into US Dollar strength. Further breakouts and extended momentum would easily favor further gains in said currency trading strategies, and a busy week of economic event risk may make for similarly eventful forex moves in the days ahead. Our favored 1-week volatility measure already shows that traders expect major moves in the week ahead, and we will position ourselves accordingly.

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals – Our trading systems have started the year well, and we expect similarly good conditions for Breakout and Momentum strategies in the week ahead. Further price extension in US dollar pairs will likely generated further gains in standing Momentum and Breakout trades, and elevated implied volatility levels on forex options suggests that traders are prepared for major currency moves in the week ahead.

Given the sheer unpredictability of recent market conditions, we have weighted our trading preferences towards higher-reward Momentum and Breakout systems. Our Range trading systems work well in times of limited forex price extension (when currencies trade in narrow ranges), but they do especially poorly during times of strong price breakouts. Our Momentum and Breakout systems, by comparison, tend to lose slowly during times of tight trading ranges. Yet short periods of breakouts will often generate enough gains to completely erase a much longer period of losses. Thus we will revert to favoring both Momentum and Breakout trading systems unless we are absolutely sure that currencies will trade in narrow ranges for a foreseeable period of time.

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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