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US Dollar At Critical Juncture - How do we Trade the Week Ahead?

US Dollar At Critical Juncture - How do we Trade the Week Ahead?

2012-09-04 16:25:00
David Rodriguez, Head of Product
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The US Dollar (ticker: USDOLLAR) trades near make-or-break levels against the Euro, British Pound, and Japanese Yen ahead of critical FX market event risk – how do we set our trading biases amidst clear uncertainty?

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_us_dollar_outlook_nonfarm_payrolls_body_Picture_1.png, US Dollar At Critical Juncture - How do we Trade the Week Ahead?

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) continues to trade below key support versus the Euro and British Pound, but Dollar resilience versus the Japanese Yen and other key counterparts sets the stage for a make-or-break week for the US currency. FX Options markets show that 1-week volatility expectations are at monthly highs ahead of four key central bank interest rate decisions and US labor market data.

The Dow Jones FXCM Dollar Index currently trades in a progressively narrower price triangle formation—pointing to an imminent break. As such we’ll cautiously position ourselves for mostly range trading across key pairs absent the major breakout or breakdown in the USDOLLAR.

As far as the DailyFX PLUS Trading Signals systems go, this means favoring “Range2”/”Congestion Opportunities” trades until further notice. It’s critical to note that this bias can and will likely change on a major USD breakdown. But we’ll be sure to update our biases accordingly as conditions dictate.

Market Conditions:

FX Options volatility expectations continue near five-year lows, but it’s critical to note that our 1-week Volatility Index has jumped to monthly highs ahead of a pivotal week for US Dollar pairs. The clear jump in vols warns of imminent breakout and could soon force us to shift our strategy trading biases.

forex_us_dollar_outlook_nonfarm_payrolls_body_Picture_2.png, US Dollar At Critical Juncture - How do we Trade the Week Ahead?

The important divergence between volatility and the Dow Jones FXCM Dollar Index likewise suggests that the safe-haven USD could continue to outperform despite unfavorable market conditions.

forex_us_dollar_outlook_nonfarm_payrolls_body_Picture_3.png, US Dollar At Critical Juncture - How do we Trade the Week Ahead?

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

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

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 90-day 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 90-day 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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