- A sharp drop in FX market volatility prices suggests we will see smaller moves ahead
- Our focus shifts away from high-volatility strategies
- The "Tidal Shift"/Momentum2 system may continue to do well in key pairs
DailyFX PLUS System Trading Signals – A sharp drop in forex volatility prices suggests that the US Dollar may trade in a progressively narrower range versus the Euro and other major currencies. We see little choice but to change our trading tactics on a slowdown in market moves.
Last week we wrote that a surge in FX volatility prices could force the US Dollar beyond its recent trading range and we positioned ourselves for big moves, but even a disappointing US labor market report was unable to break the EURUSD above key highs.
Forex options traders have now sent 1-week volatility prices (seen in the chart below) near their lowest levels on the year, and the prospect of slower moves limits our optimism for our top volatility-friendly automated trading strategy: Breakout2.
Forex Volatility Prices have Tumbled as the US Dollar Sticks to Tight Trading Range
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations
Our trend-following Momentum2 system has nonetheless placed a number of successful trades across US Dollar pairs in the past several weeks.
Past performance is not indicative of future results, but we like its prospects going forward in pairs such as the Euro/US Dollar, US Dollar/Swiss Franc, and a number of Japanese Yen crosses (though not the USDJPY).
For other pairs we’ll stick to the sidelines for now. Volatility is mostly mean-reverting; periods of especially low volatility are often followed by big FX moves and vice versa.
But positioning ourselves for aggressive forex price swings seems needlessly risky when volatility prices are so low. Sign up for e-mail updates via my distribution list for any updates and view the table below for current strategy preferences.
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.