Article Summary: The US Dollar, Japanese Yen, and major forex pairs have seen substantial volatility, but history shows things could get even worse. How might we play it?
DailyFX PLUS System Trading Signals – It’s difficult to understate the significance of recent market moves, but some historical perspective suggests things could get far worse before they improve.
A look at FX options market volatility prices shows traders predict the largest Japanese Yen moves since 2011—pretty significant. And yet a quick look at historical prices (chart below) shows that we’re still a fraction of the levels seen through the heights of the financial crisis in 2008.
In fact, the S&P 500 Volatility Index (VIX) hasn’t even hit its highest since last year, while our DailyFX 1-Month Volatility Index is similarly below 2012 peaks. Why might the next move be clear?
Forex Options market and S&P 500 Volatility Prices From 2007-2013
Source: OTC FX Options Prices, CBOE Data from Bloomberg; DailyFX Calculations
10-year US Government Treasury Notes saw their biggest 1-week decline in a decade (yields surged). Let’s think about that for a second: the world’s supposed foremost safe-haven asset is seeing truly historic sell-offs. That’s reason enough to believe that the S&P 500, major forex pairs, and other asset classes could continue to see big moves.
Past performance is not indicative of future results, but our sentiment-based trading strategies have done well in highly-volatile markets. That said, our go-to breakout trading strategy (Breakout2) has done less-well through last week’s choppy moves in key pairs.
Our major focus remains the Momentum2 strategy—also known as the “Tidal Shift” system. It was named “Tidal Shift” because it was designed to catch major market reversals. It’s thus far caught some fairly substantial turns in the Dollar, Yen, and other pairs. There’s reason to believe it could continue to do well.
View the table below to see our strategy preferences broken down by currency pair. This table is updated every Monday morning and, if market conditions warrant, throughout the week. Sign up for e-mail updates via my distribution list (3-5 e-mails a week, no spam—I promise).
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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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.