Currency Trading Strategies from DailyFX+ Prove Strongly Profitable in October

Our DailyFX+ Forex Trading Signals saw their best single-month performance on strong market volatility, and expectations for similar price action could likewise produce good conditions for our automated trading strategies. Indeed, our DailyFX 1-week volatility index shows that forex options traders expect clear market turbulence to persist; though it has fallen from recent peaks, the volatility index remains in extremely elevated territory. Thus we have little reason to change our stance on our forex trading signals, and we are hopeful that our trading strategies will continue to outperform through near-term trade.

Forex Trading Automated Strategies Outlook

DailyFX+ System Trading Strategies - Our “Momentum2” trading strategy has been far-and-away the best-performing system through the month of October, as the sentiment-based signals have had remarkable accuracy in timing US Dollar and Japanese Yen moves. Such clear outperformance leaves us wondering whether the strategy may continue to excel. Studies of the short-term performance of our trading strategies have shown that several weeks of outperformance do not necessarily translate into further gains. That is to say, there has not been a strong link to suggest that the strategy of the month will continue to perform well through subsequent weeks of trading.

Our “Momentum1” strategy has, perhaps unexpectedly, significantly lagged “Momentum2” and only posted modest gains on the month. The typically slower-moving strategy has been hurt by excessive short-term volatility, as it trades longer-term trends. Elsewhere, both “Breakout1” and “Breakout2” did predictably well in these conditions. Over the medium term, we prefer sticking with “Breakout2”, as it has historically outperformed “Breakout1”.

Both “Range1” and “Range2” systems continue to perform poorly on clear market volatility, and we would expect strategies that buy declines and sell rallies to underperform in clear breakout markets. The question now becomes whether we can expect a near-term recovery in both Range strategies. Studies of these strategies suggest that they will continue to underperform as long as volatility remains very elevated. Until our “Volatility Percentile” figures fall below 75 across the board, we would continue to underweight our range-trading strategies.

Forex Discretionary Strategy Outlook

Speculative Sentiment Index Trading Signals –Given that our traditional SSI signals are produced with a medium-to-long-term time frame in mind, sharp short-term price moves clearly represent a risk to the strategies. Visit our Forex Trader Sentiment and Positioning Thread on the FX Forum to discuss these signals.

Dynamic Carry Trade Basket – Please see our weekly report on Carry Trades for a better idea on what to expect through short-term trade: Forex Carry Trade Outlook.

DailyFX+ Forex Market Conditions Outlook

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 three months 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 quarterly 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 quarterly 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.

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.