Forex Volatility Risks Fall, but Keep Watch on Gold-Linked Currencies
- Forex volatility prices drop considerably, suggest US Dollar to consolidate
- Continued moves in Commodity Bloc nonetheless Breakout2 trading system
- We look to the Momentum2 trading strategy in other USD pairs
A sharp drop in forex volatility prices suggests that recent US Dollar gains may slow, but price momentum leaves us in favor of trend-following trades in key pairs.
The Dow Jones FXCM Dollar Index recently hit its highest levels in three months, and overall market trends clearly favor continued USD gains. Yet a notable drop in FX volatility prices/expectations shows that few expect the Greenback to match its current pace, and indeed this may invite some consolidation in the FX majors—notably in the EUR/USD, USD/JPY, and GBP/USD
Forex Volatility Prices Tumble to Fresh Lows, Point to US Dollar Consolidation
Data source: Bloomberg, DailyFX Calculations
Volatility risks nonetheless remain high in the Commodity Bloc—the Australian, New Zealand, and Canadian Dollars—as we see substantial declines in gold prices and sympathetic moves in other commodity markets.
Thus our focus remains on the Breakout2 strategy in those currency pairs, while the trend-following Momentum2 system could continue to do well in other USD counterparts.
A key caveat is that our trading biases could change if we see a similar drop in Commodity Bloc volatility, but until that happens we’ll stick to our recent calls.
See the table below for full detail on market conditions and preferred trading strategies.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
Understand the Breakout2 Trading System via our previous article
Auto trade the trend reversal-trading Momentum2 system via our previous article.
Trade with strong trends via our Momentum1 Trading System
Use our counter-trend Range2 Trading system
--- 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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