Article Summary: The US Dollar stands to fall further off of recent peaks—we’ll look to sell into weakness as our sentiment-based trading strategies switch direction.
DailyFX PLUS System Trading Signals – The US Dollar continues to trade noticeably off of highs set just a week ago, and relatively stable forex volatility prices suggest the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) could trade to fresh lows in the days ahead.
Last week we wrote that our Momentum2 strategy stood to do well if this was indeed the start of a larger Dollar reversal, and indeed it sold the USD against the Euro (long EURUSD) and other currency pairs. Unfortunately, choppy price action has meant that those trend-following strategies have started the week with losses. Can we expect improved performance going forward?
Much of our US Dollar outlook hinges on the Greenback’s next moves, and it seems as though traders are biding their time ahead of highly-anticipated commentary from US Federal Reserve Chairman Ben Bernanke.
We won’t normally change our more quant-minded trading strategy preferences based on single economic news events, but Bernanke has single-handedly sparked some fairly massive Dollar moves. It would be foolish to ignore risk of further USD volatility.
Our hypothesis remains the same: the Dollar remains in a clear uptrend as the largest bond bubble of a generation bursts. But nothing moves in a straight line, and indeed we see scope for short-term Dollar weakness.
Forex Options Market Volatility Prices From 2012-2013
Source: OTC FX Options Prices, CBOE Data from Bloomberg; DailyFX Calculations
Our sentiment-based trading strategies have done well trading the Dollar uptrend, but the past several weeks of trading have been far less impressive and indeed Momentum2 has started the week with losses.
The systems tend to do best during times of strong market trends. The fact that the US Dollar has essentially traded in a choppy range through the first two weeks of July makes us less optimistic through short-term trading. As such, we’ll reduce our exposure across the board and adjust trading biases if market conditions warrant.
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DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
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--- 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.
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.