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Volatility to Pick up on US NFPs, We're Watching these Strategies

Volatility to Pick up on US NFPs, We're Watching these Strategies

2015-11-03 15:25:00
David Rodriguez, Head of Product
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- All eyes turn to key US Nonfarm Payrolls report, likely to determine US Dollar direction

- We will maintain our trading bias in favor of the Momentum2 trading system

- A notable drop in volatility warns against over-dependence on the Breakout2 trading system

The US Dollar remains in control in what will likely be an important week for FX market trends. Which way are we trading?

A highly-anticipated US Nonfarm Payrolls report will help determine whether the US Dollar continues onto fresh 12-year highs. And indeed NFPs remains one of the top market-moving events not only for the US Dollar but for broader financial markets.

It is thus perhaps surprising to see FX volatility prices remain relatively low ahead of US labor market data, but it is likewise clear that any major surprises out of upcoming event risk could change that in a hurry.

The uncertainty surrounding the US currency and broader FX markets means that we will cautiously look to trade the Momentum2 trading system in several USD pairs in the week ahead. The system looks to trade major shifts in crowd sentiment and is often the first to switch direction if we see a notable change in direction. Just as importantly, it will tend to do well during times of strong market movements and may outperform if the US Dollar continues on to fresh 12-year highs.

Relatively low volatility expectations warn against relying on our high-vol Breakout2 trading system until further notice.

Forex Volatility Prices Pull Back, but US NFPs Likely to Spark Sharp Short-Term Moves

Volatility to Pick up on US NFPs, We're Watching these Strategies

Data source: Bloomberg, DailyFX Calculations

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

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Volatility to Pick up on US NFPs, We're Watching these Strategies

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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