weekly range

Forex Trading Signals Update: Range-Bound Price Action Favors Range Trading Strategies

Monday, 10 November 2008 14:39:01 GMT  |  David Rodriguez, Quantitative Analyst

Our preferences for our DailyFX+ Forex Trading Signals have changed fairly dramatically through recent currency price action, as major pairs’ inability to break out of key trading ranges leave current strategies at key risk for losses. Indeed, our two Breakout-based strategies may suffer if pairs such as the Euro-US Dollar and British Pound-US dollar remain stuck within consolidation patterns. As such, we have shifted our focus towards Range-trading forex strategies, as these are typically the top performers in lower-volatility environments.

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals – Our trend-based “Momentum2” forex strategy saw truly impressive performance through the extreme price swings in October, but increasingly range-bound price action suggests that currency trends may be cut short through upcoming price action. That leaves both “Momentum1” and “Momentum2” at risk, while breakout-based “Breakout1” and “Breakout2” strategies are perhaps most prone to periods of low market volatility. As such, we are reassessing our trading strategy preferences and leaning more towards low-volatility “Range1” and “Range2” strategies.

We have historically watched implied volatility levels on forex options as an accurate gauge for subsequent price volatility, but recently distorted options markets suggest that currently elevated levels overstate volatility expectations in the currency market. Much like over-the-counter cash forex transactions, there is no true centralized market for forex options. And, unlike cash forex, there is no de facto standard for settling forex options (in cash forex, there is the highly successful Continuous Linked Settlement, or CLS system).

As such, poor liquidity conditions will hit forex options especially hard and distort implied volatilities across the board. Thus our standard volatility gauge may in fact over-emphasize volatility expectations in the forex market, and we believe that actual volatility may be a good deal lower than forex options would otherwise suggest.

DailyFX+ Forex Market Conditions Outlook

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 three months 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 quarterly 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 quarterly 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.

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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