The Euro has traded consistently off of its $1.3170 high, while the Dow Jones FXCM Dollar Index has similarly traded solidly off of recent lows. The critical question becomes whether this is the start of a larger US Dollar recovery.
FX Options show that volatility expectations are at multi-year lows. The safe-haven US Dollar tends to do poorly in slow market conditions, and the clear downtrend in vols helps explain the broader USD downtrend.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
Given such extremely low volatility readings, we have little option but to favor slow and steady USD declines across the board. Our “Tidal Shift”/Momentum2 strategy has nonetheless done well in both going long and short the US Dollar in recent weeks. Its resilience in the face of adverse market conditions makes it our favored strategy until further notice.
It has been quite some time since we favored using our previously-popular “Breakout2/Breakout Opportunities” system, and the reason is simple: breakout trading tends to work best during more volatile market conditions.
Euro volatility expectations are now at their lowest levels sinc ethe EURUSD set its all-time high of $1.60 in 2008. It was at that point that extremely quiet market conditions led to substantial reversals across the board.
We can’t know whether we will see similar through the foreseeable future as major tops/bottoms are only clear in hindsight. Yet we warn against gettting too complacent amidst such incredibly low volatility levels.
Extremely low forex options market volatility expectations suggests that currencies will continue to move in tight intraday ranges.
Yet volatility expectations can only remain so low for so long. We may be near a significant turning point in market conditions, and caution is urged amidst clear risks of turnaround.
--- 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.
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