Thursday, January 13, 2011

Forex Strategy Outlook: Breakout Trading Attractive on US Dollar Volatility

Market Conditions Summary
Sharp US Dollar exchange rate moves and elevated forex options
market volatility expectations point suggest breakout and trend
trading strategies may continue to outperform in the week ahead.

In December we shifted our strategy biases towards low-volatility
Range systems amidst slow moves in key currency pairs, and our
benchmark range trading Relative Strength Index system generally
performed well. With the start of the New Year and a commensurate
shift in market expectations, it seems prudent to move away from
systems that will tend to do poorly in faster-moving market
conditions. Our volatility-friendly Channel Breakout system and our
Breakout-based DailyFX+ Trading Signals systems subsequently look
attractive. Forex Options markets volatility expectations show that
traders are betting on and hedging against faster-moving markets in
the New Year, and we will position ourselves accordingly.

Forex Trading Automated Systems Outlook
DailyFX+ System Trading Signals – Our trend and breakout trading
systems had a strong week of performance on sharp US Dollar moves, and
elevated volatility expectations suggest Breakout and Momentum systems
could continue to do well in the week ahead. Perennial outperformer
Breakout2 was well-positioned to take advantage of such moves and
remains favored through upcoming price action. Our range systems
predictably performed poorly amidst sharp moves, and traders should
treat most range trading ideas with skepticism as currency pairs are
relatively unlikely to hold tight ranges.

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 system was the top performer in a week
of sharp exchange rate volatility, and market conditions are likely to
favor such a volatility-friendly strategy until further notice. The
slow-moving Moving Average Crossover system did particularly poorly
amidst a sharp US Dollar reversal, while the RSI Trading strategy has
and will likely continue to underperform amidst sharp currency price

DailyFX Individual Currency Pair Conditions Summary
Written by David Rodríguez, Quantitative Strategist for,
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Range Strategy – The benchmark range trading system shows the
hypothetical performance of a simple Relative Strength Index strategy
on 60-minute EURUSD [2], GBPUSD [3], USDJPY [4], USDCHF [5], USDCAD
[6], AUDUSD [7], and NZDUSD [8] 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

Trend Strategy – The benchmark trend trading system shows the
hypothetical performance of a simple Moving Average Crossover strategy
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
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.


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