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US Dollar Surge is Misleading, Strategy Sells into Gains

US Dollar Surge is Misleading, Strategy Sells into Gains

2013-03-18 15:15:00
David Rodriguez, Head of Product
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Article Summary: Forex volatility surged as the US Dollar (ticker: USDOLLAR) rallied versus the Euro, but the sharp Greenback reversal suggests a broader USD-bearish forecast remains valid.

DailyFX PLUS System Trading Signals A sharp jump in volatility on the Cypress bailout initially sent the US Dollar (ticker: USDOLLAR) higher across the board, but the subsequently sharp correction suggests that the Greenback may give back much of its gains as the AUDUSD and other pairs recover losses.

The surge in short-term volatility would normally be enough to leave us in favor of Breakout trading across the board, but the fact is that our measures of forex volatility have given much of their early-session gains. Instead we’re paying close attention to the Dollar turnaround—particularly as our fundamental forecast leaves us in favor of USD pullbacks.

Our forex sentiment-based Momentum2 trading system is currently short the USD versus the Australian Dollar and may soon sell it against the British Pound. We think the system stands to do well on the quick turnarounds in price action.

Japanese Yen currency pairs remain bright spots for all of our sentiment-based trading strategies, and trading the Yen downtrend remains attractive against all except the US Dollar.

DailyFX Forex Volatility Indices

forex_strategy_forecast_us_dollar_volatility_body_Picture_1.png, US Dollar Surge is Misleading, Strategy Sells into Gains

Our volatility indices bounced sharply into Monday’s trading session, but the line chart above hides the fact that they’ve actually given back most of their single-day gains. The fact that volatility has quickly reversed suggests that this may not be the start of a larger surge.

View the table below to see our strategy preferences broken down by currency pair.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_strategy_forecast_us_dollar_volatility_body_x0000_i1026.png, US Dollar Surge is Misleading, Strategy Sells into Gainsforex_strategy_forecast_us_dollar_volatility_body_1a.png, US Dollar Surge is Misleading, Strategy Sells into Gains

View how to automate the high-volatility Breakout2 Trading System via our previous article and webinar recording.

Auto trade the trend reversal-trading Momentum2system via our previous article and webinar recording.

Trade with strong trends via our Momentum1 Trading System and view an archived webinar

Use our counter-trend Range2 Trading system and view an archived webinar guide on automation

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

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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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