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Forex Analysis: Trading Strategies Continue Buying US Dollar

Forex Analysis: Trading Strategies Continue Buying US Dollar

2012-11-12 16:15:00
David Rodriguez, Head of Business Development
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Article Summary: Our forex sentiment-based trading strategies have turned heavily long the US Dollar against major forex counterparts. Said systems have done well in recently-slow market conditions. And though past performance is not indicative of future results, we favor trading systems that have produced fairly consistent results across USD pairs.

DailyFX PLUS System Trading SignalsThe US Dollar (ticker: USDOLLAR) trades at multi-month peaks versus the Euro and other major counterparts; current market conditions suggest the Greenback could see further gains.

We believe that the US Dollar may have set a significant bottom against the Euro and other counterparts on an important shift in forex sentiment. A key caveat remains, however: FX volatility levels trade near their lowest levels since the onset of the financial crisis. The safe-haven US currency tends to do well during times of financial market turmoil, and exceedingly steady market conditions often produce Dollar weakness.

Yet we won’t argue with price action, and the fact remains that the USD currency remains in a steady uptrend—producing strong trend trading signals. Our forex sentiment-based trading signals are currently long the USD versus the Euro, Australian Dollar, British Pound, Canadian Dollar,and New Zealand Dollar. And though past performance is not indicative of future results, these trend trades have done reasonably well in recent months.

We’ll stick to trend trades in several US Dollar pairs, but be wary of potentially choppy short-term price moves amidst extremely low forex options market volatility readings.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_us_dollar_forecast_bullish_body_Picture_2.png, Forex Analysis: Trading Strategies Continue Buying US Dollar

Market Conditions:Our DailyFX Volatility Indices are at their lowest levels since the onset of the financial crisis in 2007/2008, and it’s clear that FX Options traders are positioned for slow currency moves. We have little choice but to favor low-vol strategies until we see a shift in market expectations.

Indeed, unchanged market conditions suggest we should stick to strategies that have done well as of late—underlining reasons why we have produced few shifts in our individual currency trading bias.

DailyFX Volatility Indices from 2011-2012

forex_strategy_us_dollar_forecast_bullish_body_Picture_1.png, Forex Analysis: Trading Strategies Continue Buying US Dollar

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-- 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 to David’s e-mail distribution list via this link.

Contact David via

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

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

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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