We Like Trading the US Dollar Break Higher but When?
DailyFX PLUS System Trading Signals – The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) continues to hold key lows and position itself for a potentially major move higher, but the all-important question is ‘When?’
Last week we claimed that the most important factor in US Dollar trading was forex volatility. In short: the Greenback tends to do poorly during very quiet market conditions and do well as markets begin moving sharply.
The problem with our Dollar-bullish forecast remains the same: forex volatility prices continue to trade near year-to-date lows, and we view a US Dollar break higher as unlikely in current market conditions.
Forex Volatility Prices Continue Trading near Year-to-Date Lows
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations
What could change that? There are a handful of key events on the US economic calendar which could bring sharp FX moves, and indeed we will maintain our “wait and see” approach on key US Dollar levels.
With the Japanese Yen in particular, there is key resistance in the ¥99.20-100 zone, and a USDJPY break above could signal that a broader Dollar reversal is in play. Alternatively a break below its 200-day Simple Moving Average and key lows near ¥95.20 would put a clear dent in our Dollar-bullish forecast. View full technical forecast for the USDJPY.
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
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--- 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.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.