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Euro Tumbles Produce Volatility and Trading Opportunities

Euro Tumbles Produce Volatility and Trading Opportunities

2012-07-23 16:00:00
David Rodriguez, Head of Product
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Fresh multi-year Euro lows against the US Dollar (ticker: USDOLLAR) have produced an important jump in forex volatility—offering attractive trading opportunities in the week ahead.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_outlook_euro_forecast_body_Picture_1.png, Euro Tumbles Produce Volatility and Trading Opportunities

DailyFX PLUS System Trading SignalsThe Euro has started the week sharply lower against the US Dollar (ticker: USDOLLAR), and continued EUR weakness could be just enough to drive broader currency volatility in the days ahead. Last week we warned that our DailyFX Volatility Indices were at their lowest levels since May as traders positioned themselves for small currency moves. Yet a sharp late-week EURUSD sell-off set the stage for stronger volatility into the days ahead.

Our proprietary Speculative Sentiment Index-based trading strategies are now aggressively short the Euro against the US Dollar, and we think such trades have a fair chance at success. Said systems have likewise bought into Japanese Yen surges, and Euro and Yen pairs may offer attractive opportunities to play strong market indecision in the days ahead.

The Euro and Japanese Yen are somewhat unique in this regard, however; currencies such as the Australian and New Zealand dollars remain relatively strong against the US Dollar.

Continued European turmoil has the potential to create volatile market conditions across broader forex markets, and the Japanese Yen continues to strengthen within a broader uptrend. We’ll concentrate on EUR and JPY pairs until further notice, as trading conditions seem far more ambiguous across broader US Dollar pairs.

Market Conditions:

Forex options volatility expectations have jumped noticeably across Euro and Japanese Yen currency pairs, but it’s important to note that it has not been enough to force a more substantial breakout across the board. The divergence has fairly clear implications for price action—any strong price moves seem likely to be limited to the EUR and JPY. For other pairs we might expect some sympathetic intraday volatility, but we see risks that trading conditions may remain challenging in non EUR and JPY currency pairs. We will shift our strategy biases accordingly.

forex_strategy_outlook_euro_forecast_body_Picture_2.png, Euro Tumbles Produce Volatility and Trading Opportunities

--- 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.

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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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