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Trading in Volatile Market Conditions
FOREX.com Research Team
(November 3, 2008) Currency price moves have been unprecedented over the past few months, on the back of the tumultuous events in the global credit markets. In October, daily volatility reached historical levels, with highly liquid currency pairs like EUR/USD moving more than 250 points in a single day. Less liquid currencies such as USD/NOK and USD/SEK have seen average daily moves of more than 2,200 pips.
| Average daily high to low trading range (pips) |
| | 2000-2008 | October '08 |
| AUD/USD | 77 | 365 |
| AUD/JPY | 103 | 505 |
| USD/JPY | 106 | 268 |
| EUR/USD | 107 | 276 |
| EUR/JPY | 133 | 523 |
| GBP/USD | 138 | 419 |
| EUR/NOK | 531 | 1804 |
| EUR/SEK | 540 | 1494 |
| USD/DKK | 627 | 1167 |
| USD/NOK | 771 | 2206 |
| USD/SEK | 875 | 2229 |
| Source: Bloomberg |
Because high volatility is expected to continue for the remainder of 2008, traders are advised to take into account this new dichotomy when deciding what currencies to trade and what sessions to trade, as well as to consider the potential impact of current market conditions on their overall trading strategy.
Be aware of liquidity peaks/troughs throughout the trading day
The Asia session has historically been a session lacking in volatility, with very little business being transacted. That historical dynamic has almost fully reversed, with trading volumes in Asia rivaling the trading volumes seen in London and New York sessions. The fact remains that liquidity during the earlier portion of the trading day (Asia session) is at its trough, which has lead to wider bid/offer prices during those periods. As we migrate around the clock towards the NY session, more participants in the market translates into tighter pricing.
Utilize stop loss orders and adjust risk/reward ratios
A consistent use of stop-loss orders is advised, along with an amount of leverage that is proportionate to the recent volatile price moves. This is especially important when trading less liquid currencies such as the NOK , SEK, and DKK pairs -- where moves of 1000-2000 pips in a single day have become commonplace. Even when trading liquid currencies such as EUR, GBP and JPY, consider the recent higher volatility when developing trading strategies and set-ups.
Perhaps the most essential resource one can have in this environment of quickly changing markets is information. Remember to stay up to date with FOREX.com's intraday market commentary, daily and weekly research.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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