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Forex Trading Signals Outperform on Explosive Market Volatility

Thursday, 18 September 2008 17:39:21 GMT

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Written by David Rodriguez, Quantitative Analyst

Forex trading market volatility has reached incredible heights, with our DailyFX 1-Week Forex Volatility Index hitting its highest levels since the Asian Financial Crisis and collapse of Long Term Capital Management. It is difficult to find a profitable forex trading strategy for such adverse market conditions, but we feel that some of our forex trading strategies are well-positioned to generate profits. Our Forex Trading Signals will be provided free for a limited time, so make sure to take advantage of the opportunity.

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Preferred Forex Trading Strategies

Tremendous gains in forex market volatility present prime conditions for our “Breakout” system trades, while our “Range” trade system signals present comparatively unattractive risk-to-reward levels. Visit the “Trading Signals” page on our DailyFX+ Currency Trading page to view these trading signals free for a limited time. In terms of DailyFX Analyst reports, we continue to favor Speculative Sentiment Index-based trades. We would underweight DailyFX+ “Range” signals, while similarly placing caution on any trade ideas from the DailyFX “Pairs to Range Trade” report.

Automated Forex Trading Strategies Outlook

DailyFX+ System Trading Signals – Pay special attention to attractive Breakout and Momentum trades through the near term, as they should continue to outperform in current forex trading market conditions. Our “Range” signals currently show less promise, and traders should underweight or proceed with caution with any such trade ideas. 

DailyFX.com Discretionary Strategy Outlook

Speculative Sentiment Index Trading Signals – Our Speculative Sentiment Index signals have captured respectable profits as of late, but we see that a sharp drop in open interest across major currencies may weaken the strength of individual currency signals. All the same, our most recent SSI update shows that forex trading crowds sell dollars, and the contrarian signal forecasts declines. Visit our Forex Trader Sentiment and Positioning Thread on the FX Forum to discuss these signals.

Pairs to Range Trade – Major currencies continue to break out of their medium term trading ranges, and we would advise against placing too much weight on range trading strategies. The typical high-risk/low-reward range trade tends to underperform in strongly trending markets. 

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

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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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