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Low Forex Volatility Favors US Dollar Selling

Low Forex Volatility Favors US Dollar Selling

2012-10-15 16:00:00
David Rodriguez, Head of Product
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Article Summary: A strong correlation between the US Dollar and FX market volatility implies that the USD stands to weaken on extremely quiet market conditions. We favor selling into any significant Dollar advances and following our sentiment-based “Tidal Shift/Momentum2” systems on most USD-short positions.

DailyFX PLUS System Trading SignalsOur DailyFX Volatility Indices continue near their lowest levels since 2007 as FX Options traders predict extremely slow currency moves through the foreseeable future. We will try to use slow markets to our advantage: real trader data shows that quiet market conditions favor specific trading styles.

In concrete terms this means we will continue to try and sell any major US Dollar bounces, as that strategy has served us well through recent trading. Mostly unchanged market conditions give us little reason to deviate from what has worked well, and indeed we retain our overall US Dollar-bearish bias.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

us_dollar_trading_forecast_quiet_fx_markets_body_Picture_1.png, Low Forex Volatility Favors US Dollar Selling

We have similarly left our strategy biases unchanged as we generally favor any trades that sell into Greenback bounces. The “Tidal Shift”/Momentum2 strategy continues to do well in its attempts to sell USD strength, and indeed we’ll look to similar opportunities through the foreseeable future.

Clear exceptions include the Australian Dollar/US Dollar pair and the USDJPY; we favor buying US Dollar dips in both of these pairs. The “Tidal Shift” system has captured respectable gains as it has sold AUDUSD, and we think it stands to do well on similar AUD-shorts in the foreseeable future.

It has been quite some time since we favored using our previously-popular “Breakout2/Breakout Opportunities” system, and the reason is simple: breakout trading tends to work best during more volatile market conditions.

us_dollar_trading_forecast_quiet_fx_markets_body_Picture_2.png, Low Forex Volatility Favors US Dollar Selling

Low vols have likewise correlated with important US Dollar weakness, and that indeed is a major reason behind our broadly bearish USD trading bias.

Market Conditions:Extremely low forex options market volatility expectations suggests that currencies will continue to move in tight intraday ranges.

us_dollar_trading_forecast_quiet_fx_markets_body_Picture_3.png, Low Forex Volatility Favors US Dollar Selling

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

To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up for his e-mail distribution list via this link.

Contact David via

Twitter at http://www.twitter.com/DRodriguezFX

Facebook at http://www.Facebook.com/DRodriguezFX

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.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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