Forex Strategy Outlook: FX Options Favor Trend Trading Systems - A noteworthy drop in forex options market volatility expectations suggests that currency moves may slow in the week ahead

Market Conditions Summary
A noteworthy drop in forex options market volatility expectations
suggests that currency moves may slow in the week ahead, arguing
against aggressive bets on breakout strategies in major pairs.

We favored volatility-friendly Breakout systems through the past 7
days of trade with mixed results. A major US Dollar breakdown against
the resurgent Euro made for excellent Breakout and Trend trading
conditions, but more moderate moves in other currency pairs meant that
our benchmark Channel Breakout system saw a mixed stretch of trading.
The drop in volatility expectations theoretically favors overall range
trading and the benchmark Relative Strength Index system. Yet one gets
the sense that fairly unpredictable market conditions could shift
expectations in an instant, and we express caution in going overweight
Range strategies amidst seemingly unstable market sentiment. Our
strategy biases are subsequently made with relatively little
conviction until we see more consistent market sentiment.

Forex Trading Automated Systems Outlook
DailyFX+ System Trading Signals – Momentum2 was the top-performing
system in a fairly mixed week for our trading strategies, with
perennial outperformer Breakout2 narrowly squeezing out gains on
inconsistent moves across currency pairs. The Euro saw substantial
appreciation against the US Dollar and other major counterparts,
driving performance in Breakout and Momentum systems. Yet other
currencies saw much more muted moves and limited broader gains for
said systems through the same stretch. A mixed outlook for market
conditions makes strategy biases unclear, but without a sharper drop
in volatility expectations we'll continue to favor Momentum and
Breakout systems across most 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
Benchmark Range, Trend, and Breakout strategies saw quite mixed
performance through the past seven days, and unclear forecasts make it
admittedly difficult to favor any one strategy for the week ahead.
DailyFX Individual Currency Pair Conditions Summary
Written by David Rodríguez, Quantitative Strategist for
DailyFX.com, drodriguez@dailyfx.com
To be added to this author's distribution list, send an e-mail
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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.
Source: Dailyfx.com