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Forex Strategy Outlook: Breakout Strategies Attractive on Jump in Volatility

Forex Strategy Outlook: Breakout Strategies Attractive on Jump in Volatility

2010-07-19 14:18:00
David Rodriguez, Head of Product
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Market Conditions Summary

Forex market volatility expectations jumped considerably through last week’s late S&P 500 reversal, pointing to strong price moves in the days ahead. Of course, the past several weeks have seen considerable choppiness in volatility expectations themselves—thus we hesitate to call for continued breakouts with great conviction. Yet the noteworthy pick up in vols warns that currencies may see outsized fluctuations and we will accordingly shift our biases towards volatility-friendly Breakout strategies.

FSO-10-07-19-01

 

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals –Intense choppiness in volatility has made selecting strategies especially difficult through recent trade, and the past week was no exception. We started with a bias towards Range trading strategies, and that panned out relatively well until Friday’s outsized currency moves. Given the subsequent jump in volatility expectations, it seems ill-advised to stick to our Range trading bias. Thus we will return to our long-standing bias towards Breakout2 trades in the days ahead.

Traders may nonetheless want to hedge their bets and look to Range2 on several rangebound pairs. There is distinct risk that volatility expectations may once again fall and currencies return to trading within tight ranges.

To gain a greater understanding of all six trading systems, view my recent presentation on DailyFX+ on our forex forums:

http://forexforums.dailyfx.com/david-rodriguez/215278-dailyfx-power-tools-trading-signals-technical-analyzer-david-rodriguez.html

 FSO-10-07-19-02 

DailyFX+ Forex Market Conditions Outlook

FSO-10-07-19-03 

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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