You often hear statements such as "FX is volatile that's why I trade it". So just to put some numbers to the idea I had a look at the daily ranges expressed in % moves of ASX20 stocks, FX and Equity Index futures. This is what I found taking data from June the 1st this year to now.
So it seems that again a trading cliche doesn't stack up to reality. Its clear that FX is not volatile by the amount of leverage that people have to use to make the smaller moves meaningful for profit and loss. Of course that's doesn't make FX the worst instrument to trade nor is daily range the best or only indication of a good instrument to trade. I would consider trading cost, tick size and spread far more important.
One often selling point by FX brokers is that its a 24 hour market. For me this is actually the biggest negative for a couple of reasons. Firstly this game is addictive and tiresome. Having your market open all the time removes the necessary break and time away from endless hours at the screen. This cannot be underestimated. A lot of the learning comes once you step away from doing and focus on what you have done, in a calmer state. You cannot do this while the quotes are flashing changes in front of your eyes. Especially if you are going through a draw-down. And maybe the biggest changes happen when your market closes and you are in a disgusted state from your seemingly stupid actions. If your market is still open and you are in a distressed state your likely to just add to your problems. But at close time that is a great opportunity to start the "never again" planning while you cannot do any more damage to your equity and head.
The other negative of the 24 hour market for me is actually the time that the action is spread over. Take the HSI. Its only open for 4 & 1/2 hours yet you get at least the daily range that most FX instruments take 24 hrs to do. The closing and reopening of equity markets for a daytrader is where the opportunity lies. When you have lots of money being put to work in a limited time. Your trades are on and they are either proven right or wrong quickly. Then you can move on to the next idea or better still walk away from the screen and have a life.
one further point about the range of FX - most people will trade the euro session when they are daytrading FX. Currently you'll find the eurusd having anywhere from a 30-60 pip range on an average day(depending on what you use as a start and finish time for the session). Add in the fact that quite a few of the high and low prints made are news related spikes and it starts to look even worse. Not exactly as dead as the SPI, but far from the volatile beast that most new traders think it is.
Posted by: frink | September 12, 2009 at 09:58 AM
Great article TH, love reading your posts mate.
Posted by: Keir | September 22, 2009 at 02:34 PM
Spoken like someone with truly no knowledge of the FX market? Aside from E/J the pairs you picked are all chosen by traders for their specifically low volatility. Especially E/U is known for the nothing-nothing-boom style of movement.
Why don't you show us the avg % for GBP/CHF, GBP/JPY, EUR/AUD?
Generally speaking, as a currency trader, I will wait for the Frankfurt open (and London one hour later) and trade the hottest of the four majors (E/U, G/U, U/CHF, U/J) or its corresponding JPY pair.
Posted by: sinner | October 26, 2009 at 02:58 PM
I wasted 2 minutes of my live running the GBPJPY & GDPCHF daily range stats as per the fools suggestion and I was spot on. People think they are trading something with large volatile % moves but they are as per usual clueless and even more dangerous, think they are knowledgeable. And as always not even smart enough to check before they open their mouth.
GBP/CHF daily Range 0.89%!!
GBP/JPY daily Range 1.35%
They don't even get close to Equity indexes.
Posted by: THT | October 26, 2009 at 05:01 PM
TH, I find it pretty amusing because I was thinking about this more last night. The pairs you picked are all closely index correlated these days. E/U is supposed to be 90% correlated to SP500 and U/J after the crash has been highly inverse correlated to the DJ.
Why don't you work it out in pips instead of % and see the difference. For one thing, you will find the pairs you listed are somewhere "in the middle" of the forex volatility movements, certainly not on the higher end. This chart shows the average daily range in pips from Apr 08 to 09.
http://www.aboutcurrency.com/images/university/currencypairs/currencypairs_tradingrange.jpg
As per "the fools" suggestion, you will get way more pips trading GBPCHF, GBPJPY or even plain old GBPUSD off the London open than you would trading the FTSE, why don't you pull up a chart about 6pm tonight and see if I'm wrong.
Posted by: sinner | October 27, 2009 at 09:57 AM
OMG. That's exactly my point. The reason newbies think its moves so much is because of the leverage. As a PERCENTAGE range they don't move much. To get meaningful P&L moves you have to use large LEVERAGE. If FX traders had to trade risk adjusted they would all be broke in a month.
Posted by: THT | October 27, 2009 at 10:07 AM
Whatever man, I look for 30-50 pips a day with a consistent 1:2 R:R and know plenty of traders do the same. The leverage is larger, so what? I risk 1% to make 2%, I don't pay attention to the leverage.
Posted by: sinner | October 27, 2009 at 12:02 PM