special reports

Currency Trading Market Conditions Favor Range Trading

Wednesday, 10 December 2008 15:02:11 GMT  |  David Rodriguez, Quantitative Analyst

Major currency pairs remain largely range-bound through recent price action, as forex trading markets remain largely directionless amidst similar movements in the US Dow Jones Industrials Average. Speculators are largely searching for direction, and currency market volatility has fallen sharply through recent price action. Such developments leave our bias for our currency trading strategies fairly clear: we will continue to favor range trading strategies until we see a return to major currency breakouts.

The US Dollar itself stands at a fairly significant crossroads against the Euro, as it trades to the top of its month-long trading range. The broader theme of low volatility across financial markets signals that the Euro/US Dollar is somewhat unlikely to break higher, but a flare-up in market tensions could just as easily force major moves in the Euro and other currencies.

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals – Our Range1 and Range2 strategies have been the top performers through the past week of price action, and we expect similarly range-bound conditions through short-term trade. Our confidence in such forecasts is increasing, as we have seen across-the-board declines in volatility expectations. The DailyFX 1-week volatility measure now stands at its lowest levels in two months, and overall momentum favors further declines.

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 prove beneficial. 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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