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Forex Volatility Prices Tumble - Our Strategy Shifts Accordingly

Forex Volatility Prices Tumble - Our Strategy Shifts Accordingly

2015-09-21 14:50:00
David Rodriguez, Head of Product
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- Forex volatility prices tumble following disappointing Federal Reserve decision

- US Dollar likely to stick to tight ranges, but conditions could quickly change if these levels break

- Real data suggests that retail trader performance improves in slower-moving markets

The US Dollar continues to trade in a tight range against the Euro and other majors, and a notable drop in volatility prices suggests we should switch strategies in the week ahead.

A highly-anticipated US Federal Reserve interest rate decision has come and gone, and an initial US Dollar sell-off has proven short-lived as major Greenback pairs stick to wide ranges. And indeed FX Options markets show that broader volatility prices have tumbled; USD pairs seem likely to trade sideways until further notice.

The key caveat is that a major break of important US Dollar support levels—particularly against the Japanese Yen—would likely change market dynamics in a hurry. Until this happens, however, we see little option but to change tack and move away from high-volatility trading strategies until further notice.

Forex Volatility Prices Fall Sharply Following US Federal Reserve Interest Rate Decision

Forex Volatility Prices Tumble - Our Strategy Shifts Accordingly

Data source: Bloomberg, DailyFX Calculations

In the past several weeks we’ve emphasized that our data shows that the majority of retail traders tend to do poorly during fast-moving markets. This is due to the fact that most tend to range trade—buy low and sell high. Past performance is not indicative of future results, but the drop in volatility prices suggests that range trading strategies could be in a position to do well.

By the same token, our volatility-friendly Breakout2 system looks less attractive for the week ahead.

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 Prices Tumble - Our Strategy Shifts Accordingly

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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