Positioning for Big Moves ahead of Fed Meeting, Major FX Volatility

DailyFX

Article Summary: It’s shaping up to be a make-or-break week for the US Dollar and Japanese Yen. How are we looking to trade it?

DailyFX PLUS System Trading Signals Forex volatility prices continue to press to fresh highs, and we could see some substantial US Dollar and broader currency moves on a critical week for forex markets. Markets have certainly been volatile relative to what we saw in late-2012/early 2013, but volatility levels suggest that stocks and currencies could see much larger moves ahead.

Last week I pointed to high Japanese Yen volatility as a reason that it might see an important reversal (USDJPY bounce). Yet traders clearly had other things in mind as extremely one-sided positioning fueled a panic-driven USDJPY sell-off, and it seems clear that episodes of sharp panic would likely hurt the USDJPY and other US Dollar pairs.

Our forecasts for the Dollar and the Japanese Yen are even less certain than usual as the upcoming US Federal Reserve interest rate decision could be a game-changer for financial markets and the Greenback itself.

Forex volatility prices are elevated across the curve—our DailyFX 1-week Volatility Index is near its highest since 2011, while 1-month and 3-month levels are not far behind.

Forex Options Market Volatility Prices Across Major Pairs

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Source: OTC FX Options Prices from Bloomberg, DailyFX Calculations

Past performance is not indicative of future results, but our sentiment-based trading strategies have done well in highly-volatile markets. That said, our go-to breakout trading strategy (Breakout2) has done less-well through last week’s choppy moves in key pairs.

Our major preference thus turns to the Momentum2 strategy—also known as the “Tidal Shift” system. It was named “Tidal Shift” because it was designed to catch major market reversals. And if this is indeed the start of key short-term reversals, it could potentially do well across key JPY and US Dollar pairs.

View the table below to see our strategy preferences broken down by currency pair. This table is updated every Monday morning and, if market conditions warrant, throughout the week. Sign up for e-mail updates via my distribution list (3-5 e-mails a week, no spam—I promise).

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

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View how to automate the high-volatility Breakout2 Trading System via our previous article and webinar recording

Auto trade the trend reversal-trading Momentum2system via our previous article and webinar recording.

Use our counter-trend Range2 Trading system and view an archived webinar guide on automation

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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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.

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