You may have noticed that 2014 hasn't been a particularly volatile year in the forex market so far. I personally have noticed it while day trading. The majors are moving well under 100 pips per day, and while there are volatile days, on average, most days are fairly sedate.
The EURUSD has long been one of my staple day trading pairs, but volatility has changed over the last few years. See attached chart.
Updated forex volatility and correlation studies are available at: http://vantagepointtrading.com/daily-forex-stats
The decrease in volatility leaves a smaller margin of error for momentum day traders. When the EURUSD is moving 130 pips a day it is much easier to step and grab a quick 20 pips a number of times. When the pair is moving 70 pips per day, this is more difficult.
There are a couple different options for dealing with this, which I will address in a moment.
The EURUSD isn't the only one affected though. We are seeing lulls in a number of other popular pairs, such as the USDJPY and GBPUSD
Pairs that Are Moving More
While some of the pairs may seem a little flat, others are showing more volatility. I have been finding myself taking more trades in the USDCAD and EURCAD lately. The USDCAD is still moving a ton (73.3 pips per day average, similar or less than the aforementioned pairs), but volatility has been increasing in 2014, providing more short-term opportunities.
The EURCAD is the most volatile it is been in more than a year, moving 124 pips a day based on a 10-week average.
What to do About Decreased Volatility
So while there are some pairs that are moving a bit a better (see the Daily Forex Stats page for full break downs of volatility in many pairs), the question of the day is still: When volatility sinks, what do you do?
One option is to increase position size and trade smaller moves. I do use this method if I see opportunity I like, yet when day trading I am seeing less opportunities I like than I did a couple years ago, for example. If you are finding your strategies aren't producing good signals in a low volatility (or high volatility) environment, this isn't really an option.
Another option is to equalize the playing field to a volatility you like. I love it when the EURUSD or GBPUSD is moving 130 to 150 pips a day. But when it is moving 75, not so much. But over the course of two or three days, then we typically see the 150 pips moves (moving 75 pips per day). In essence, in the current conditions I am looking for a lot more swing trades, and less day trades.
If I see good day trade setups, I trade them, and I make day trades every day. But in the evening I am spending more time scanning the 30-minute, hourly, 4-hour and daily charts for setups which could last 1 to 4 days. By trading on this time frame, being able to capture the strong momentum moves I am looking for is easier.
Finding the Balance
I gravitate toward swing trading then back to day trading in slow cycles. During volatile times, I am more inclined to day trade. When there is a lack of volatility I am more inclined to swing trade.
Many traders notice their profits drop for seemingly no reason...they haven't changed anything about their strategy! But that is sometimes the rub. As forex volatility changes certain strategies become less effective. As traders we need to stay on top of these things and realize when conditions have changed.
Now conditions have been changing in these pairs for a long time now, so hopefully most of you have made some adjustments if needed. Unfortunately I only thought to write about this topic now.
On the flip side, we are seeing a lot of complacency in many of these forex pairs, as volatility is near multi-year lows. As the long-term charts show, volatility moves in cycles. So it likely won't be too long before we start to see a lot of volatility come back into the forex market, and pairs like the EURUSD and GBPUSD will see daily moves back over the 100 pip mark.
Cory Mitchell, CMT