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Forex Markets Gear up for Rangebound Price Action as Euro Fails to Break out

Wednesday, 05 November 2008 22:07:24 GMT

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Written by David Rodriguez, Quantitative Analyst
Our DailyFX+ Forex Trading Signals saw their best single-month performance on strong market volatility, but there are early signs that strong price moves may slow through the near term. As such, we are re-assessing our strategy preference and moving away from our strong bias towards “Breakout” trading systems. Key currency pairs’ unwillingness to break out of recent ranges suggests that we may see similarly Rangebound action through upcoming forex trading.  

 

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Forex Trading Automated Systems Outlook
DailyFX+ System Trading Signals – Our “Momentum2” trading strategy was far and away the best performer of all strategies through the month of October, and both “Breakout1” and “Breakout2” posted impressive gains. Yet we fear that a sudden slowdown in price volatility and a return to trading within ranges may hurt the accuracy of these trading signals. Both “Breakout1” and “Breakout2” are especially sensitive to Rangebound markets, as these strategies depend on strong price extensions to produce profits.
Extremely elevated forex options implied volatilities suggests that markets remain geared up for strong price moves, but such elevated numbers have not translated into price breaks in major pairs. Thus our “Volatility Percentile” figure may prove misleading through the near term, and we would underweight Breakout signals until further notice.

DailyFX+ Forex Market Conditions Outlook

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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.
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