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Top Trading Strategy in Current Market Conditions

Top Trading Strategy in Current Market Conditions

2014-05-27 14:45:00
David Rodriguez, Head of Product
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- Watching US Dollar range trading opportunities vs Yen, Euro

- Our data shows majority of retail market range trades

- Low FX volatility leaves us looking to buy low/sell high until further notice

FX market volatility trades near record-lows, and the US Dollar, Japanese Yen, and other currencies seem likely to stick to big ranges. Here’s how we’re trading.

Such slow market conditions keep us squarely focused on range-trading strategies. That is: buying low, selling high. This seems simple in concept and it is. In fact our data on 12 million real trades shows that the majority of retail traders do exactly that—range trade.

The difficulty is that many of those same traders are less likely to trade in those conditions. This seems somewhat irrational, but realistically it comes down to a simple factor: boredom. How might we counteract this natural tendency?

Forex Volatility Prices Continue to Trade near Record Lows, Price Action Likely to Remain Slow

Top Trading Strategy in Current Market Conditions

Data source: Bloomberg, DailyFX Calculations

Read more: Why is Forex Volatility So Low, and How do we Trade it?

There’s little hiding the fact that currency movements have slowed, but instead of focusing on the lack of volatility we’ll concentrate on existing trading opportunities. The DailyFX currency pair conditions table below underlines which pairs are more or less likely to stick to tight trading ranges based on current volatility prices.

Of note are tight trading ranges in Japanese Yen currency pairs as well as a handful of USD majors. Our Senior Strategist highlights potential range trading opportunities in the USDJPY as it trades near important resistance, while the Euro/US Dollar exchange rate itself may have found an important range low.

Until volatility prices move higher we’ll continue to favor range trading. What happens when volatility inevitably surges? Keep track of changing conditions with future e-mail updates via my distribution list.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Top Trading Strategy in Current Market ConditionsTop Trading Strategy in Current Market Conditions

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.

DISCLOSURES