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Forex Strategy Outlook: Caution Urged Amidst Uncertain Market Conditions

Forex Strategy Outlook: Caution Urged Amidst Uncertain Market Conditions

2010-07-05 15:42:00
David Rodriguez, Head of Product
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Market Conditions Summary

Forex market volatility expectations have picked up noticeably through the past week of trade, but the sheer choppiness across financial markets makes it especially difficult to anticipate market conditions with any degree of conviction. The “volatility of volatility” has been especially elevated, and we are admittedly at a loss on what to expect. Given such indecision, we will shift towards low-risk/high-reward Breakout-style trading, which typically benefits on sudden explosions in market volatility.

FX market conditions can and do change quite rapidly. Breakout systems do poorly for extended periods of time only to benefit on the eventual jump in volatility. Range trading strategies tend to do quite well in quieter market conditions but subsequently lose big when prices grow more volatile. Keep an eye on key barometers such as the S&P 500 to get a sense for relative stability in financial markets and subsequent implications for FX volatility.

07.05_ST1

07.05_ST2

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals – Perennial outperformer Breakout2 has seen a resurgence in the past week of trade, benefiting from the sudden jump in market volatility and taking advantage of several US Dollar and Japanese Yen breakout trades. We have made little secret of our preference for this strategy through most market conditions, and we will accordingly shift our bias towards said trades through the coming week. As always, it serves to note that it is the type of strategy that will rack up relatively small losses for extended periods of time and as such requires patience. Yet with any luck, the ensuing breakout should offset previous losses.

It is worth noting that slower-moving price-following strategies such as Momentum2 and Momentum1 tend to do especially poorly in range trading environments. We warn against taking excessive leverage in said trades until we see further evidence that currencies can continue breaking major support and resistance levels amidst strong trends.

07.05_ST3

DailyFX+ Forex Market Conditions Outlook

07.05_ST4

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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