News Column

Huge Week for Markets Warn of Big Dollar, Yen Moves

February 3, 2014

David Rodriguez

- US Dollar may test fresh highs as markets remain especially volatile - Three major global central bank meetings and a US NFPs report promise big moves ahead - Our volatility-friendly Breakout2 strategy may do well across Dollar and Yen pairs Traders brace for big market moves on a week with three major central bank meetings and a highly-anticipated US Nonfarm Payrolls report. How are we trading? What started as a sharp sell-off in Emerging Markets led to similarly pronounced moves in the Developed world. And indeed, subsequent turmoil leaves us looking higher for the Japanese Yen and the US Dollar in particular . FX Options markets shows that traders are betting on/hedging against the largest forex market moves since September, 2013--the week of the infamous "No Taper" Fed meeting. We see little option but to position ourselves for similarly large FX moves in the days ahead, and our volatility-friendly Breakout2 trading strategy could do well across Japanese Yen and US Dollar currency pairs in particular. To a lesser extent we likewise favor our trend-following Momentum2 trading strategy. Past performance is NOT indicative of future results, but it has thus far done well amidst recent flare-ups in market tensions. Forex Volatility Prices Have Jumped, Favoring Stronger Market Moves Ahead Source: OTC FX Options Prices from Bloomberg ; DailyFX Calculations DailyFX Individual Currency Pair Conditions and Trading Strategy Bias --- Written by David Rodriguez , Quantitative Strategist for Contact David via 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 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 90-day 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 90-day 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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Source: DailyFx

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