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Forex Volatility Risk Remains High on Critical Week for US Dollar

Forex Volatility Risk Remains High on Critical Week for US Dollar

2015-08-31 14:55:00
David Rodriguez, Head of Product
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- Forex volatility prices point to a big start to the month of September across FX markets

- Our focus remains on our high-volatility Breakout2 trading strategy

- We’ll keep a close eye on the DJ FXCM Dollar Index as it breaks key resistance

The US Dollar ends the month of August almost exactly where it began versus the Euro and other key counterparts. What might we expect in the coming week and in September?

All eyes turn to key economic event risk for the US economy in what promises to be a big week across financial markets. Indeed, forex volatility prices have surged following last week’s pronounced financial market turmoil and point to an important stretch for the US Dollar and other major currencies. The next question is obvious: which direction is more likely for the USD and broader counterparts?

As it stands, the Dow Jones FXCM Dollar Index has clawed back above key resistance and looks to resume its uptrend. Yet further gains are hardly guaranteed, and it will be very important to watch how it starts the new month of trading.

History suggests that currencies are more likely to set highs and lows at the beginning and the end of a given period—e.g. highs/lows for September are more likely to occur in the first week than mid-month. Past performance is not necessarily indicative of future results, but we’ll watch how the Dollar reacts to key data in what promises to be an exciting stretch across financial markets.

Derivatives markets are pricing in some fairly significant market moves in the coming week—further raising the likelihood of decisive price action.

Forex Volatility Prices Remain Elevated on Key Week for FX Markets

Forex Volatility Risk Remains High on Critical Week for US Dollar

Data source: Bloomberg, DailyFX Calculations

Our data shows that the majority of FX traders tend to do poorly in times of elevated market volatility, and current market conditions warn that it may be another challenging week for traders. We have observed that majority of traders tend to range trade—buy when prices are low and sell when prices are high. This works well during quiet market conditions, but such a technique is also likely to do poorly during fast-moving markets.

Traders should likely avoid range trading until we see some semblance of ‘normalcy’ in currency trading markets. In the meantime we’ll look to our volatility-friendly Breakout2 to outperform across key US Dollar and Japanese Yen pairs.

See the table below for full detail on market conditions and preferred trading strategies.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Forex Volatility Risk Remains High on Critical Week for US Dollar

Understand the Breakout2 Trading System via our previous article

Auto trade the trend reversal-trading Momentum2system 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

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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