Euro May Decline, but Caution Urged on Difficult Forex Conditions
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
DailyFX PLUS System Trading Signals –An 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.
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.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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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.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.