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US Dollar Poised for Major Volatility, Breakout Strategies Attractive

US Dollar Poised for Major Volatility, Breakout Strategies Attractive

2011-05-30 16:35:00
David Rodriguez, Head of Business Development
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The US Dollar is likely to see significant volatility in the week ahead as traders anxiously await the results of May Nonfarm Payrolls data due Friday. FX Options markets accordingly price in major moves across the board and favor volatility-friendly trading strategies.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_us_dollar_body_Picture_4.png, US Dollar Poised for Major Volatility, Breakout Strategies Attractive

DailyFX+ System Trading SignalsWe have shifted our strategy biases in favor of trend-following and volatility-friendly Momentum1 and Breakout2 strategies in what promises to be an eventful week of price action. Normally we would likewise favor the Momentum2 system, but it has seen a disappointing two-week streak of losses. The range-trading Range2 system looks attractive on several currency pairs. Yet elevated volatility expectations warn of sharp currency moves and caution is warranted.

forex_strategy_outlook_us_dollar_body_Picture_1.png, US Dollar Poised for Major Volatility, Breakout Strategies Attractive

To gain a greater understanding of all six trading systems, view my recent presentation on SSI and the trading signals on our FXCM Digital Expo page.

Volatility expectations are riding high amidst heightened uncertainty surrounding euro zone fiscal crises and whether the US economy can continue its recovery. To that end, the week ahead should provide clarification on both fronts: rumors suggest the EU is contemplating a second wave of fiscal aid to Greece, while late-week US NFP data could go a long way in clarifying outlook for the world’s largest economy. Expect sharp currency moves.

forex_strategy_outlook_us_dollar_body_Picture_2.png, US Dollar Poised for Major Volatility, Breakout Strategies Attractive

Benchmark Trading Systems

7 days

30 days

90 days

365 days

Range Strategy

-$671.63

-$1,270.24

-$3,877.95

-$2,624.13

Trend Strategy

-$82.31

$1,329.95

$2,229.62

-$1,191.81

Breakout Strategy

$729.62

-$3,872.81

-$4,696.13

-$11,122.65

forex_strategy_outlook_us_dollar_body_Picture_3.png, US Dollar Poised for Major Volatility, Breakout Strategies Attractive

Data and Backtest Results Generated using FXCM Strategy TraderNOTE: These are NOT the DailyFX+ Trading Signals Systems

The benchmark Channel Breakout system saw a noteworthy bounce from recent lows, while our Breakout2 system likewise saw modest improvement. Overall the DailyFX+ trading strategies are significantly outperforming their benchmarks, which have overall languished through recent months of price action.

Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com

To be added to this author’s distribution list, send an e-mail subject line “Distribution list” to drodriguez@dailyfx.com

Definitions

Range Strategy – The benchmark range trading system shows the hypothetical performance of a simple Relative Strength Index strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It sells when the 14-period RSI falls below 70 and buys when it crosses above 30. No other trading rules are used. Hypothetical results are generated using FXCM Strategy Trader.

Trend Strategy – The benchmark trend trading system shows the hypothetical performance of a simple Moving Average Crossover strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It buys the currency pair when the 50-period Simple Moving Average crosses above the 100-period and 200-period averages. It sells when the 50-period crosses below the 100-period and 200-period averages. No other trading rules are used.

Breakout Strategy – The benchmark breakout trading system shows the hypothetical performance of a simple Channel Breakout strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It will set a buy order at the highest high of the previous 20 bars plus one pip and a sell order at the lowest low of the previous 20 bars minus one pip. No other trading rules are used.

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.

Bias – 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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