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Forex Strategy Outlook: Major Dollar Volatility Leaves Breakout Bias Intact

Forex Strategy Outlook: Major Dollar Volatility Leaves Breakout Bias Intact

2010-05-10 17:41:00
David Rodriguez, Head of Product
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Market Conditions Summary

A surge in financial market volatility has produced substantial swings for the US Dollar, leaving FX Options markets volatility expectations at their highest in over a year. Our strategy bias subsequently remains weighted towards volatility-friendly Breakout strategies, and such trading styles have seen somewhat of a resurgence through recent trade. Whether or not they continue to outperform will almost certainly depend on the trajectory of the Euro and US Dollar; the recently-announced Euro Zone bailout package threatens to slow volatility across these key world currencies.

It remains very important to monitor any and all swings in financial market risk sentiment. Though the S&P 500 has recovered a great deal of its earlier losses through the week’s open, any subsequent shift in risk appetite could just as easily push it to fresh lows through the coming week’s trade. Such an event would almost certainly lead to similarly volatile moves in the US Dollar and other key forex counterparts.

WSO510a

 

DailyFX Volatility Indices

WSO510b

 

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals – Our Momentum and Breakout systems have racked up respectable gains through the past several days of market volatility, and elevated volatility expectations leaves our longer-standing trading bias intact. Indeed, systems such as Breakout2 tend to thrive in times of broader financial market strains and we hold out hope that recent outperformance will continue into the coming week’s trade. Traders should eye most Range1 and Range2 trades with an eye of skepticism through times of sharp price moves. Such strategies tend to get stopped out quickly if currencies begin to trend and break major technical levels.

WSO510c

 

DailyFX+ Forex Market Conditions Outlook

WSO510d

 

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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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