weekly range

Forex Strategy Outlook: US Dollar Range Critical to Trading Bias

Monday, 27 July 2009 14:40:10 GMT  |  David Rodriguez, Quantitative Strategist

Forex trading markets have threatened to break the US Dollar from its long-standing trading range against the Euro, but an overall downtrend in forex options volatility expectations makes sustained price breaks somewhat unlikely.  Though momentum-based trading systems have been clear outperformers through recent trade, continued drops in volatility could constrain the trend-following strategies. Suffice it to say, our outlook for near-term market conditions will largely depend on whether the Euro/US Dollar currency pair breaks its two-month long trading range.

Our strategy biases have been admittedly inconsistent as of late, as generally indecisive markets give mixed signals on market conditions. Brief flare-ups in market tensions have forced multi-week spikes in forex options markets volatility expectations, but they otherwise remain in a fairly clear downtrend. In fact, that is essentially the only real constant through recent trade: volatility is trending lower. Though we ostensibly maintain a short-term Momentum trading bias, outlook is summarily unclear and it will be critical to watch whether the EURUSD breaks its year-to-date highs.

Momentum2 was our top-performing system on the week, as a sustained US Dollar pullback greatly benefited the trend-following strategy. The strategy remains heavily net-short the USD, and near-term performance will clearly depend on the trajectory of the recently downtrodden US currency. Euro/US Dollar range highs remain critical, and it will be very important to watch whether the currency pair is able to break above congestion levels. 

We remain very cautiously overweight Momentum2 for the time being, but a hold of medium-term ranges would force us to re-evaluate our trading biases.  

DailyFX+ Market Conditions Outlook

NOTE: Data has once again been changed. Due to the ineffectiveness of the 30-day horizon, we are returning to the original 90-day time horizon.

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 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 –  90-day closing high.

Range Low  –  90-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.

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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