Forex Strategy Outlook: US Dollar Breakout Critical to Trend Systems
Written by David Rodriguez, Quantitative Strategist
Our forex trading strategies have seen major gains on the US Dollar’s breakdown against key currencies, as the trend-following systems remain heavily short the USD through time of writing. It had increasingly become a battle of patience for breakout traders who have waited for the US currency to break below key levels. Now that the Greenback has finally broken, the question becomes whether we can see sustained directional moves in the Euro/US Dollar and other important pairs. A relatively muted response from volatility expectations limits optimism for continued trends.
We were fortunate to remain biased towards 'Momentum' trading signals through the past week of trade, as currency pairs have finally seen major sustained price moves on the US Dollar and Japanese Yen breakdown. It was a gutsy decision as the USD was near major support, and it is a similarly gutsy decision to remain biased towards Momentum systems as we are at prime risk for reversal. Suffice it to say, we hope to have similar fortune in the week ahead.
Momentum2 and Breakout2 have largely underperformed through the past month or so of trading, but the very recent USD and JPY breakdowns have left both systems with sizeable floating profits. We remain similarly bullish the strategies through the coming week's trade, but we are wary of risks that FX markets will see major retracements on sizeable moves. There is obviously little way to know for sure whether such pullbacks may occur, but we will keep risk relatively tight on any Momentum or Breakout trading positions.
DailyFX+ Market Conditions Outlook
NOTE: Data has once again been changed. Due to the ineffectiveness of the 30-day horizon, we are returning to the original 90-day time horizon.
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 monthly 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 monthly range.
Range High – 90-day closing high.
Range Low – 90-day closing low.
Last – Current market price.
Strategy – 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.
