Currency Trading Market Conditions Difficult to Forecast: Look for Good Range Trading Strategies

Currency trading market conditions have been especially difficult to predict as of late, and strategy preferences for our forex trading signals are far from certain. Major currency pairs were largely set to trade within narrow ranges through a holiday-shorted week. Yet US Government’s bailout of Citigroup sparked impressively sharp moves in the US Dollar and Japanese Yen through the week’s open. Residual effects from said announcement has left price action choppy, and current levels of implied volatility on forex options suggests that traders expect major moves in the days ahead. As we have mentioned, however, forex options have recently overstated true volatility expectations due to pronounced illiquidity in over-the-counter derivatives markets.

We maintain that price action in major currency pairs is likely to slow down through the short term, but our confidence in said forecast is especially low. Due to the fact that major interbank dealing desks will scale back operations through upcoming North American holidays, we see potential for sharp price moves on poor forex market liquidity.

Forex Trading Automated Systems Outlook

DailyFX+ System Trading Signals – Our Range1 and Range2 strategies have been the top performers in the past 7 days of trading, as major currency pairs have remained within their broad trading ranges despite remarkable intraday price movements.  We expect that this will continue to be the case through upcoming trading, but we likewise caution that these sharp intraday moves will make it especially difficult to control risk on positions. That is to say, stops may have to be especially wide to account for short-term price movements despite largely range-bound price action. Our preference remains with Range1 and Range2 systems, but we cannot stress enough that markets will likely continue their incredibly choppy intraday price moves—especially through relatively illiquid holiday trading conditions.

All the same, our Momentum2 strategy seems to be holding up surprisingly well despite adverse market conditions. It remains the top performer in the past 30 days, as it has been able to catch quick shifts in market sentiment due to its shorter-term trading bias. Yet we likewise caution that it has historically underperformed during periods of range-bound price action. If we are correct in our forecasts for major currency pairs, Momentum2 may begin to underperform through near-term price action. Longer-term Momentum1 trades as well as shorter-term Breakout2 and Breakout1 trades may likewise find themselves at a disadvantage through periods of poor price extension.

DailyFX+ Forex Market Conditions Outlook

NOTE: Methodology has been changed. Percentiles are now measured on a 30-day basis, down from 90 days previously.

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 30 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 30 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 –  30-day closing high.
Range Low  –  30-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.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FOREX CAPITAL MARKETS, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FOREX CAPITAL MARKETS, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FOREX CAPITAL MARKETS, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.