Article Summary: Forex options traders point to smaller market moves in the days ahead—any US Dollar pullbacks could offer opportunities to buy at more attractive prices.
DailyFX PLUS System Trading Signals – Forex volatility prices have started the week sharply lower, and indeed it seems as though we’re setting up for a quieter week of trading on limited FX economic event risk.
Given that the US Dollar (ticker: USDOLLAR) has rallied on a sharp gain in volatility, it might mean that the USD may give back some recent gains as financial markets recover from recent turmoil.
Our hypothesis nonetheless remains the same: the US Dollar stands to hit further multi-year highs as the largest bond bubble of a generation bursts. This may be particularly true against the yield-sensitive Japanese Yen as the USDJPY exchange rate hits fresh peaks.
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 recent US Dollar uptrend, but the recent slowdown in market volatility suggests that several of our systems could give back some of their recent gains. Our major focus nonetheless remains the Momentum2 strategy—also known as the “Tidal Shift” system.
The system has done well in getting long the USD on a number of occasions now. If we’re correct in our calls for a USD pullback, the same strategy might in fact attempt to go short the Dollar. Any such trades could work, but we’ll reduce leverage if the systems do indeed go against our longer-term Dollar-bullish bias.
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).
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
--- 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.