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Euro May Decline, but Caution Urged on Difficult Forex Conditions

Euro May Decline, but Caution Urged on Difficult Forex Conditions

2012-06-18 16:15:00
David Rodriguez, Head of Product
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The Euro surged against the US Dollar (ticker: USDOLLAR) on a conservative victory in Greek elections, but a subsequent tumble in Spanish bonds leaves the Euro trading lower and poised for further declines in volatile trading conditions.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_conditions_strained_difficult_body_Picture_1.png, Euro May Decline, but Caution Urged on Difficult Forex Conditions

DailyFX PLUS System Trading SignalsAn exceedingly volatile and choppy start for the Euro against the US Dollar (ticker: USDOLLAR) warns that conditions may remain challenging in the week ahead. Indeed, most of our own trend and volatility-based forex trading strategies are currently on the sidelines given clear market indecision.

Last week we wrote that exceedingly high volatility expectations favored strong currency moves across the board, but our one-week volatility index fell sharply following Greek election results. In fact the DailyFX 1-Week Volatility Index posted its single-largest daily decline since May, 2010—following the so-called “flash crash” in US stock markets. In other words, volatility itself is extraordinarily volatile. Rather than treat its sharp drop as sign that currency markets may return to normal, we believe that sharp moves warn of strained market conditions.

Clear uncertainty across markets emphasizes the need for strong money management techniques amidst fast-changing market conditions. We believe that volatility-friendly “Breakout Opportunities” and “Breakout2” strategies of our DailyFX PLUS Trading Signals may do well, but it is critical to protect against outsized losses on the risk that markets could just as quickly switch direction.

Market conditions are likely to remain especially challenging, and caution is advised as traders were positioned for the worst ahead of the Greek elections.

Market Conditions:

Our DailyFX 1-Week Volatility Index has posted its single-largest daily decline since May, 2010—shortly after the ‘flash crash’ that forced substantial losses in US stock markets. We might take low volatility expectations to mean that currency moves may be limited in the week ahead. Yet such high volatility in volatility itself warns of strained market conditions. We urge caution in what could be challenging trading in the days ahead.

forex_strategy_outlook_conditions_strained_difficult_body_Picture_2.png, Euro May Decline, but Caution Urged on Difficult Forex Conditions

--- 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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