Forex Volatility Tumbles Post-FOMC, Major USD Losses Unlikely
- US Dollar tumbles post-Federal Open Market Committee decision
- Forex volatility prices likewise fell sharply, limiting potential for Dollar losses
- Our strategy trading preferences favor recent winners
Forex volatility prices have fallen sharply and suggest that major FX
pairs may stick to tight trading ranges through the foreseeable future.
The US Federal Open Market Committee (FOMC) sent the US Dollar sharply lower, but the simultaneous tumble in our DailyFX Volatility Indices suggests that further declines are less likely.
Forex Volatility Prices Tumble Following the Highly-Anticipated FOMC Decision
Source: OTC FX Options Prices from Bloomberg; DailyFX Calculations
In fact, our 1-Week, 1-Month, and 3-Month Volatility Indices show that traders predict some of the slowest forex market conditions since January. A strongly positive correlation between volatility and the Dow Jones FXCM Dollar Index suggests the Greenback can continue near significant lows.
Our trend-following Momentum2 trading strategy has done well selling into US Dollar weakness and remains our preferred system until further notice. Yet we’ll stress that past performance is not indicative of future results. This fact seems particularly relevant now: our sentiment-based trading systems tend to do better in high-volatility market conditions.
Our preference indeed remains towards what’s worked well to date, but it looks like a good time to trade on lower leverage in anticipation of potential underperformance in our trend-following strategies.
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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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 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.
