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