Looking to Sell Major Euro Rallies, Buy Dips in Week Ahead
- Volatility prices tumble and leave little risk of big forex market moves
- Until market conditions change, we’ll look to sell sharp rallies and buy big dips in major pairs
A continued drop in forex market volatility prices suggests that major currency moves seem unlikely in the week ahead, and until this changes we will look to trade familiar ranges in the Euro/US Dollar, US Dollar/Japanese Yen, and other pairs. Or in other words: we’re looking to buy low and sell high across the majors.
The reason is fairly straightforward: volatility expectations have fallen and continue trending lower since setting multi-year peaks. To understand why this is significant, history shows that volatility tends to cluster. If prices/expectations are high and trending higher, they will likely continue to do so and vice versa. The month-long downtrend in volatility in itself points to even-slower moves ahead.
Forex Volatility Prices are Broadly Trading Lower, Show Low Risk of Major Moves
Data source: Bloomberg, DailyFX Calculations
Until forex volatility trends change, the Euro, Japanese Yen, and other currencies are likely to stick to tight ranges versus the US Dollar and themselves. Thus we shift focus to our low-volatility range trading systems and look to simple buy low/sell high techniques through the foreseeable future. Past performance is NOT indicative of future results, but such strategies tend to do well in lower-volatility market conditions.
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.
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