Forex markets have remained rangebound as of late, boosting the appeal of currency range trading strategies. Indeed, the Euro/US Dollar currency pair initially looked as if it would break above critical resistance—ending the past month of directionless price action. Yet a US Dollar bounce quickly put an end to a sustained breakout. As a result, we continue to favor Range systems in our forex trading strategies.
We reluctantly shifted our trading biases away from Momentum systems exactly one week ago, and that has worked in our favor. Though Momentum1 and Momentum2 trading signals typically offer superior risk/reward profiles than the Range systems, current market conditions make it especially difficult to pursue trend-based trading strategies. Absent a noteworthy shift in volatility expectations, we will continue to favor systems that do well in low-volatility environments. Namely, Range-based signals and to a lesser degree, very short-term Breakout systems.
Recent market conditions have been especially challenging for trend-following Momentum1 and Momentum2 systems, while Range1 and Range2 systems have put in better performances on choppy price action. We have historically preferred higher-reward Momentum and Breakout systems, but it is clearly frustrating when currencies remain in small ranges for extended periods of time.
In our opinion, risk/reward almost always favors lower probability trend trades. Yet we cannot ignore that volatility expectations remain exceedingly low, and a steady succession of trend trade losses can frustrate even the most seasoned traders. Given such factors, we will favor Range1 and Range2 trades for the time being—treating Momentum and Breakout system trades with caution until we break out of key ranges.
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