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Forex Strategy Outlook: Dow Falls, Volatility Favors Breakout Trading

Forex Strategy Outlook: Dow Falls, Volatility Favors Breakout Trading

2011-09-05 14:50:00
David Rodriguez, Head of Product
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DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_breakout_volatility_dow_body_Picture_1.png, Forex Strategy Outlook: Dow Falls, Volatility Favors Breakout Trading

DailyFX+ System Trading SignalsBreakout2 has started the week with strength, being heavily net-long the US Dollar, Japanese Yen, and Swiss Franc as they rally against the Euro, British Pound, and New Zealand Dollar. A surge in FX Options market volatility expectations favors volatility-friendly strategies into the week ahead. Clearly past results are no guarantee of future returns, but Breakout2 tends to do especially well when our Volatility Percentiles are above 75% and 90%. We see little choice but to continuing to favor said strategy, while price-following Momentum1 and Momentum2 could likewise see solid trades if markets continue trending. Range strategies should likely be avoided.

forex_strategy_breakout_volatility_dow_body_Picture_2.png, Forex Strategy Outlook: Dow Falls, Volatility Favors Breakout Trading

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 percentiles have surged on an eventful start to the trading week, and we see little choice but to bet on strong currency moves into the week ahead. The 10% level on our 3-month DailyFX Volatility Index has previously marked shifts in trading regimes. Last week the index broke below 10% and warned that price action may slow. Yet it is now significantly above and suggests that we remain in a higher-volatility environment. Avoid systems that do poorly in such market conditions.

forex_strategy_breakout_volatility_dow_body_Picture_3.png, Forex Strategy Outlook: Dow Falls, Volatility Favors Breakout Trading

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

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.

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

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