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David Rodriguez, On Monday December 6, 2010, 11:01 am EST
Elevated Forex options markets volatility expectations continue to point to major swings in the Euro, US Dollar and other key pairs. Traders should likely favor volatility-friendly breakout trading strategies until further notice.
Elevated Forex options markets volatility expectations continue to point to major swings in the Euro, US Dollar and other key pairs. Traders should likely favor volatility-friendly breakout trading strategies until further notice.
Our benchmark Channel Breakout system hypothetically performed reasonably well through the past 7 days on sharp moves across key currency pairs. Given elevated volatility expectations, we expect that such outperformance could continue into the weeks ahead. our benchmark range trading Relative Strength Index systems fared surprisingly well through the same stretch, while sharp counter-trend moves made for sizeable losses in our benchmark Moving Average Crossover system. Given pronounced uncertainty surrounding the Euro and US Dollar, we may continue to see notable choppiness and potential underperformance in Momentum and Range trading systems. The more-nimble Breakout strategies could continue doing well in such market conditions.
Forex Trading Automated Systems Outlook
DailyFX+ System Trading Signals – Sharp moves across forex markets have made Breakout2 our top-performing system yet again, and we see little reason to switch our biases amidst prospects for similar conditions in the days ahead. Range1 and Range2 strategies held up surprisingly well through the same stretch, but it was mostly due to the fact that said systems held few trades through the same period. Momentum1 and Momentum2 essentially traded sideways, and we may see similarly directionless moves amidst choppiness in key forex pairs.
To gain a greater understanding of all six trading systems, view my recent presentation on SSI and the trading signals on our FXCM Digital Expo page.
Benchmark Trading Systems
Data and Backtest Results Generated using FXCM Strategy Trader
Our benchmark Channel breakout and RSI strategies performed approximately as well in the past week of trading. this is highly unusual, and emphasizes the admittedly strange market conditions in the past week of trade. The Moving Average Crossover system performed especially poorly on sharp counter-trend moves, and caution is advised against overleveraging amidst uncertain market conditions.
DailyFX Individual Currency Pair Conditions Summary
Written by David Rodriguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com
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Definitions
Range Strategy – The benchmark range trading system shows the hypothetical performance of a simple Relative Strength Index strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It sells when the 14-period RSI falls below 70 and buys when it crosses above 30. No other trading rules are used. Hypothetical results are generated using FXCM Strategy Trader.
Trend Strategy – The benchmark trend trading system shows the hypothetical performance of a simple Moving Average Crossover strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It buys the currency pair when the 50-period Simple Moving Average crosses above the 100-period and 200-period averages. It sells when the 50-period crosses below the 100-period and 200-period averages. No other trading rules are used.
Breakout Strategy – The benchmark breakout trading system shows the hypothetical performance of a simple Channel Breakout strategy on 60-minute EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD, and NZDUSD pairs. It will set a buy order at the highest high of the previous 20 bars plus one pip and a sell order at the lowest low of the previous 20 bars minus one pip. No other trading rules are used.
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.
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.
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Forex Strategy Outlook: Breakout Strategies Attractive on Euro Volatility
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