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Volatility Risks Surge in these Currencies - What We're Watching

Volatility Risks Surge in these Currencies - What We're Watching

2015-11-30 16:00:00
David Rodriguez, Head of Product
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- These three factors warns of a potential “Perfect Storm” of financial risks

- The EUR/USD in particular may see its most important week in months

- Our focus remains on the volatility-friendly Breakout2 system with a clear caveat

A sharp jump in financial risks ahead warns that traders should trade defensively through the foreseeable future. Here are key risks and currencies we’re watching.

The combination of three factors warns of a potential “Perfect Storm” of financial risks, and traders should pay especially close attention to Euro as the EUR/USD could indeed see its most important week in months.

We would typically view strong volatility as mostly beneficial to our vol-friendly Breakout2 trading system and to a lesser extent the trend-following Momentum2 trading system. And yet it’s critical to note that traders should actively avoid trading into a liquidity trap; these challenges moderate our enthusiasm for placing large trades in the week ahead.

A surge in short-term FX volatility prices leaves our 1-week DailyFX Volatility index at its highest in two months.

Volatility Risks Rise Substantially, Important to Watch Potential for Liquidity Gaps as Well

Volatility Risks Surge in these Currencies - What We're Watching

Data source: Bloomberg, DailyFX Calculations

We don’t wish to stay completely out of markets, but it is with a clear caveat that we stick to our

volatility-friendly Breakout2 trading system in the EUR/USD and GBP/USD. Namely: leverage should be kept low given the clear financial risks ahead. Our data suggests that traders using a maximum of 10 to 1 outperform those using larger ratios, but we would advocate using maximums of 5:1 until further notice.

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

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Volatility Risks Surge in these Currencies - What We're Watching

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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