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Caution Warranted on Big Event Risk Ahead - What are we Trading?

Caution Warranted on Big Event Risk Ahead - What are we Trading?

2014-06-02 14:40:00
David Rodriguez, Head of Product
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- Big forex economic event risk warns of EURUSD volatility

- Sentiment has grown particularly one-sided on Euro and Dollar

- Beyond EURUSD, we’re still looking at range trading opportunities

Forex traders are betting on big short-term moves in the Euro versus the US Dollar. What does this mean for trading opportunities?

The combination of a potentially critical European Central Bank interest rate decision and a US Nonfarm Payrolls employment report threaten to break key currencies out of tight ranges. Indeed, 1-week volatility prices on Euro/US Dollar options have risen near their highest levels on the year.

The obvious question is which direction for the Euro/US Dollar? We note that large speculative traders head into the week their most short EURUSD since it traded off of major lows in July of last year. And though sentiment and price extremes are only clear in hindsight, one-sided positioning does warn that losses may slow if not reverse.

Forex Volatility Spikes as Key Event Risk Heightens Likelihood of Big Moves

Caution Warranted on Big Event Risk Ahead - What are we Trading?

Data source: Bloomberg, DailyFX Calculations

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

Beyond Euro and US Dollar pairs we see comparatively less economic event risk and, by extension, lower likelihood of big moves ahead. To that end we’ll continue to watch for range trading opportunities. Or in other words: buying at important price support and selling at resistance.

Keep track of changing conditions with future e-mail updates via my distribution list.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Caution Warranted on Big Event Risk Ahead - What are we Trading?Caution Warranted on Big Event Risk Ahead - What are we Trading?

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--- 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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