Explosion in Forex Trading Ranges

Date December 9, 2008

Forex trading ranges have exploded over the past few months. The daily average trading range has doubled for all of the actively traded currency pairs in 2008, with some currency pairs even seeing a 200% rise in their average daily range.

However the big explosion in volatility has actually happened in the past 9 weeks. EUR/GBP, USD/CAD and the AUD/USD have seen the largest increases to their average daily range, but the range for the EUR/USD and GBP/USD has also increased materially.

More specifically, in 2007, the EUR/USD had an average daily range of 84 pips. Since October, its average daily range has been 267 pips, a more than 300 point rise.

Understanding trading ranges is very important because it plays a big role in developing effective money management strategies. I explore this concept in more detail in the second edition of Day Trading & Swing Trading the Currency Market.

EUR/GBP which use to known as one the range trading currency pairs saw its average daily trading range increase from 36 pips in 2007 to 142 pips since October, a whopping 400 percent rise. Say goodbye to the days of the hiding in low volatility of EUR/GBP because it is currency pair that has seen the largest expansion in volatility.

8 Responses to “Explosion in Forex Trading Ranges”

  1. Denny Price said:

    Hello,

    I was wondering if you knew an unbiased person who uses FAP Pro and would answer a question or two?

    I have been burned so many times that my trust level is very low at the moment.

    Thanks!

    Denny Price
    314.487.3037

  2. Kathy Lien said:

    Thanks for posting on my forex blog Denny, but I do not know anyone who uses FAP Pro

  3. joe said:

    i love getting info from your blog

  4. Paul Stafford said:

    Denny,

    [soapbox ON]

    there is NO automated system that works. Think about it- if there were, all the big boys - hedge funds, bank prop desks, endowments- would be using it. they spend millions on quants and computer models. if there were such a thing, there would be no market- because if we all used it, who would we profit from? (this is a zero sum game…)

    FX is and will always be hard work, continued study, and some guts. it’s a great market- large, liquid, and unmanipulated. its also very complex, and its day to day moves are demonstrably 95% noise. I esp like it because you only need to get to know 6 players (EUR, GBP etc) not 1600.

    figure out what kind of trader are you (scalper, momentum, swing, fundamentals), learn the appropriate tools, build your trading edges, put a risk management system in place (and USE IT), and begin cautiously. keep a trading log, recording not only what, but why you made a trade, and why you closed it.

    Choose a broker based on size and reputation, NOT the spread. you want to get paid when you win, and a reasonable spread allows a good broker to make a market, manage their own risk, and pay your profits.

    Read some good books- my favorites:
    “Fooled by Randomness”
    “Inside the House of Money”
    “When Genius failed”

    my 2 cents and opinion, only…[soapbox OFF]

  5. Paul Stafford said:

    and now, pursuant to the main topic, explosion in volatility in FX- and yes indeed, it has exploded…

    before I start, I’d like to point out that volatility in trading does have a specific definition. it’s one standard deviation change, in %, over one year. you can calculate shorter periods with some simple math. assuming 256 trading days/yr, a daily vol can be approximated by dividing the annual vol by sqrt *(256), or 16. so a 16% yearly vol is a 1% daily vol. or work backwards from one dsay to one year, etc.

    the $64,000 question is, how do we profit from this increased volatility? or maybe more basically, how do we not get crushed by it!

    the first tactic is using vol to your advantage. in options, we note that the value of an option is higher if the implied vol is high (because it has a greater chance of moving ITM). there are several strategies. one is to purchase spreads such as call or put backspreads, or simple straddles. these are profitable if the spot moves sufficiently in either direction! you can sell volatility by putting on short butterflies.

    if you’re just trading the spot, your alternatives are fewer. one I’ve used in the past is to buy a straddle in the middle of a trading range (ie, go long and short from the same point), and use stops. when it moves really strongly in one direction, your bad position gets stopped out and the right one keeps making profit. if it goes far enough, the total combination is profitable.

    finally, there are some pairs that I dont think have very high vol. one is $/CAD (due to central bank strength, current acct and budget balance). of course, there are ways to trade that, too…I’ve put on a long butterfly on this. if the pair ends within 1.2-1.3 in the next 50 days (1000 pip range), I”ll be profitable, with a max profit at 1.25. if it goes outside that range, I”ll lose a portion of my premiums.

    any other strategies out there for managing hi vol?

  6. mavia said:

    Don’t give up denny, gain back your confidence. Get back to demo and start with a real account went your confident ia a bit high. Use a small lot first

  7. GB said:

    Understanding trading ranges is very important because it plays a big role in developing effective money management strategies.

  8. wadzaman said:

    Thanks Kathey
    Very useful information < but can you update it to include daily ranges on 2009 too ??

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