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Forex Volatility Risk Substantial on Key Week Ahead

Forex Volatility Risk Substantial on Key Week Ahead

2015-01-19 20:45:00
David Rodriguez, Head of Product
Share:

- Extreme Swiss Franc volatility leads to a surge in broader FX volatility prices/expectations

- Exchange rate risk very high as traders fear continued turbulence

- We favor high-volatility strategies and reduced leverage through foreseeable future

Unexpected action from the Swiss National Bank has left markets on edge, and elevated forex volatility prices warn of major market moves. Here’s what we’re watching.

Our DailyFX Volatility Indices show that broader FX market volatility expectations have hit their highest levels in nearly five years—dating back to the ‘Flash Crash’ of May, 2010. An obvious shift in market conditions warns that large currency swings remain likely ahead, and this is especially true for the Swiss Franc and other European counterparts. We will shift our trading focus to higher-volatility systems and curtail leverage/exposure accordingly.

Forex Volatility Prices Surge as Markets Absorb Post-Swiss National Bank Price Moves

Forex Volatility Risk Substantial on Key Week Ahead

Data source: Bloomberg, DailyFX Calculations

The week ahead seems especially risky given a highly-anticipated European Central Bank monetary policy decision as well as Greek elections threaten big moves across Euro pairs. A strong majority of traders believe the ECB will announce unprecedented quantitative easing measures, and those expectations help explain why the Euro has fallen to fresh multi-year lows against major counterparts. Yet there remains ample room for surprise, and traders should express caution ahead of what promises to be a highly market-moving event.

In terms of trading strategy we will thus focus on trading techniques which tend to do well in fast-moving markets. Past performance is NOT indicative of future results, but our Breakout2 trading system tends to do well when volatility prices have risen. It is nonetheless critical to note that elevated volatility risks can work against us, and we’ll look to trade on lower leverage through the foreseeable future.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Forex Volatility Risk Substantial on Key Week AheadForex Volatility Risk Substantial on Key Week Ahead

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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