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Euro Poised for Fresh Lows, Trend Trading Attractive

Euro Poised for Fresh Lows, Trend Trading Attractive

2012-07-09 17:00:00
David Rodriguez, Head of Product
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DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_forecast_market_conditions_body_Picture_1.png, Euro Poised for Fresh Lows, Trend Trading Attractive

DailyFX PLUS System Trading SignalsThe Euro traded to fresh multi-year lows against the US Dollar (ticker: USDOLLAR) through recent trade, and extremely one-sided forex sentiment suggests the EURUSD downtrend will continue into the week ahead.

According to our proprietary Speculative Sentiment Index data, there are currently 1.6 retail traders long the Euro/US Dollar for every one that is short. Our SSI-based ‘Breakout2’ and ‘Momentum2’ strategies have accordingly taken short Euro positions from 1.2497 and 1.2425, respectively. Given overall market conditions, we believe that such trend-following systems stand to do well given the clear trends in key US Dollar pairs.

The critical caveat is that volatility expectations remain especially low. The Dow Jones FXCM Dollar Index retains a strong correlation to our DailyFX Volatility Indices, and the 3-month index now trades near its lowest levels since early May.

All else remaining equal, extremely low volatility favors US Dollar losses against the Australian Dollar and similar high-yielding counterparts.

The link between vols and the Aussie help explain why it has remained relatively strong compared to sharp EUR declines. As such, we believe that our trend trading strategies might do less well on AUDUSD and other volatility-sensitive pairs.

Market Conditions:

Forex options markets continue to price in slower currency moves into the days and weeks ahead, and such low expectations warn against overleveraging ourselves on high-volatility strategies.

Concretely this means we favor slower-moving range trading and to a certain extent trend trading systems into the week ahead. We may need to see a significant flare-up in financial market tensions to change our overall trading biases.

forex_forecast_market_conditions_body_Picture_2.png, Euro Poised for Fresh Lows, Trend Trading Attractive

--- 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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