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Forex Strategy Outlook: US Dollar May Shed Gains on December Effect

Forex Strategy Outlook: US Dollar May Shed Gains on December Effect

2011-12-12 19:15:00
David Rodriguez, Head of Product
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The US Dollar stands to shed previous gains as financial markets gear up for a quieter end to the trading year.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_us_dollar_lower_december_effect_body_Picture_1.png, Forex Strategy Outlook: US Dollar May Shed Gains on December Effect

DailyFX+ System Trading SignalsBreakout Opportunities had a disappointing week, as sharp intraday breakouts did not result in extended moves. In fact the system is on one of its worst drawdowns in recent memory, and we have accordingly moved away from breakout-style trades. A drop in forex options market volatility expectations favors strategies that do well in slow-moving markets.

Thus we will shift our strategy bias towards Congestion Opportunities and adapt a counter-trend style of trading. As we discussed in this week’s US Dollar trading forecast, there is considerable risk that a stock market rally in the month of December could force a noteworthy USD correction.

It obviously serves to note that the exact opposite has happened through Monday’s trading session, but the USD continues to trade below October highs against the Euro (EURUSD lows), and we expect that a substantial breakdown is fairly unlikely.

Market Conditions:

Volatility expectations have fallen off sharply into what is typically a slower month of price action, pointing to reduced currency swings across the board. The US Dollar itself has previously benefited from elevated volatility and uncertainty surrounding financial markets; thus we might expect that the reduced vols might likewise influence the USD itself. We will position ourselves for slower market moves and reasonably steady trends into the year end.

forex_strategy_us_dollar_lower_december_effect_body_Picture_2.png, Forex Strategy Outlook: US Dollar May Shed Gains on December Effect

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, 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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