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Watching These Factors to Time a US Dollar Long/Yen Short Position

Watching These Factors to Time a US Dollar Long/Yen Short Position

2013-08-12 15:45:00
David Rodriguez, Head of Product
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Article Summary: There are many factors in favor of US Dollar strength and Yen weakness. The problem is timing—what do we have to see to get long USDJPY in the week ahead?

DailyFX PLUS System Trading Signals We’re looking for opportunities to get long the US Dollar as both the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) and USD/Japanese Yen exchange rate are near major trendlines/technical levels.

The problem is this: the US Dollar tends to appreciate during times of stronger market volatility, and the fact is that our DailyFX Volatility Indices have fallen to their lowest since May—also a time of clear USDOLLAR weakness.

Forex Volatility Prices at lowest since May – key turning point for Dow Jones FXCM Dollar Index

forex_us_dollar_timing_the_japanese_yen_reversal_body_Picture_1.png, Watching These Factors to Time a US Dollar Long/Yen Short Position

Source: OTC FX Options Prices, CBOE Data from Bloomberg; DailyFX Calculations

The comparison to May is an important one: it was at the same time that both forex volatility and the USD itself made a major turn higher. Could we see a similarly significant shift in the days ahead?

It’s difficult to time important market turnarounds, but suffice it to say there are too many signs for us to ignore and we’re looking for a potential to get long US Dollar.

Our Senior Market Strategist points out that the next 48 hours in particular are significant for the EURUSD from a price and time perspective. Our Senior Technical Strategist likewise outlines what he’s watching for a potential Japanese Yen-short position against the US Dollar (USDJPY long).

This “wait and see” approach doesn’t work especially well for our sentiment-based trading strategies, as our strategy biases can and likely will change quite rapidly if this is indeed a key turning point for the Greenback. In the meantime we’ll tread lightly, but sign up for e-mail updates via my distribution list for any updates.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

forex_us_dollar_timing_the_japanese_yen_reversal_body_Picture_2.png, Watching These Factors to Time a US Dollar Long/Yen Short Positionforex_us_dollar_timing_the_japanese_yen_reversal_body_Picture_3.png, Watching These Factors to Time a US Dollar Long/Yen Short Position

Automate our SSI-based trading strategies via Mirror Trader free of charge

--- 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

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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