How volatile are forex prices?

[tomorton]

Its often said that forex is risky because its so volatile, and traders, especially newbies, should stick to equities or indices.

But where's the evidence? I was wondering how many times a typical forex pair will give a whopping 5% daily price change, and how often will a share or a major index do that?

An initial sample was Royal Dutch Shell against EUR/USD, in the years 2000-2015. These are the largest traded members of their respective groups, UK equities v's forex pairs -
days when Shell closed 5% or more higher or lower in the 2000's = 60
days when EUR/USD closed 5% or more higher or lower, same period = 0

OK, a smaller cap equity should be more volatile than Shell so what about a random mid cap such as WS Atkins? - yes, it is - 123.

But an index should be less volatile - what about the FTSE100? - yes, 25.

Of course, a nice 5% daily price change is lovely when you've got an open position in the right direction, but we're talking about risk of loss here, not risk of gain. The forex example wins hands down for safety.

Today's research is to check different forex pairs against each other, see if this approach can highlight pairs which are excessively volatile. Results to follow later.

 

[Rhody Trader]

I actually wrote a piece a while back comparing volatility across markets. Bottom line - forex markets are not particularly volatile relative to others.

 

[tomorton]

Very much to the point John, thanks. I only hope to add to and update your data.

 

[tomorton]

Looked at 36 forex pairs performance in 2014.

None showed any daily change of 4% or more, up or down. One showed a single day with a 3% change. 21 pairs showed no daily changes of 2% or more over the year. 24 days showed changes of 2% or more.

Total daily changes of 1% or more per day = 544.
Assuming a round 250 trading days per year, % of days when these 36 pairs showed a 1% or greater daily change = 544/9,000 = 6%

% of days when these pars showed a 2% or greater daily change = 24/9,000 = 0.27%

I hope this helps puts forex volatility into perspective and that you'll agree, it doesn't actually look tremendously volatile.

 

[NVP]

volatility is the oxygen of trading ........without it we die

more the better

N

 

[NVP]

is trend the same as volatility ?.............

N

 

[bredin]

I look at it like this:

In the past XX years how many (or what percentage) of stocks went to zero (total capital loss)?

How many currencies went to zero (total currency failure)?

Thus, even expressed as a percentage, which is more likely to have a catastrophic crash?

Recall that many stocks were "buy" recommendations right up to the point they stopped trading: Enron, AIG, HIH, Ansett, just off the top of my head...

G.

 

[tomorton]

Exactly.

Works the other way too - how many currencies doubled overnight because of a take-over rumour? Disaster if you wake up to find you're short a take-over target.

 

[alexaherself]

Of course, a nice 5% daily price change is lovely when you've got an open position in the right direction, but we're talking about risk of loss here, not risk of gain. The forex example wins hands down for safety ... if you were to trade both with the same leverage.

Fixed that for ya'!

I don't disagree with you at all, Tom, and I'm a forex trader myself - but I think in one sense it's a slightly artificial distinction, simply because the fact that what you're pointing out is so true is to a great extent "discounted" by the leverage that many people use to trade forex: people wouldn't be trading with such leverage if it were foreseeable to encounter 5% swings.

 

[tomorton]

Yes Alexa, the error lies with the traders and the way they trade forex - its not an inherent factor of the forex market but that's so often the way they characterise it to fool/console themselves and others.

 

[Rhody Trader]

Exactly! The motivation for the post I linked to above was continuously hearing from members of the media - and otherwise ignorant sources - that the forex market is highly risky, or some variation thereof. They weren't saying "forex trading", which is an important distinction - though I would argue you can do a pretty good job of blowing yourself up in just about any market.

 

[tomorton]

There are many factors involved which directly or indirectly affects the forex price. To gain control over such changes, forex price would be changed. Hence we can say that forex prices are volatile.

So, you don't know how volatile forex prices are, only that they are prices and surprise, surprise, they move. It wouldn't seem that MCX Tips has been a great source of knowledge for you personally.

 

[trendie]

Are there any tools to show the weekly volatility of FX and indices?
Just to gauge the most promising pairs to trade, etc.
Have been stalking NVP over on his Correlation thread, and wondered if there was a metric to see if the amount of movement away from the Correlator baseline could be used to quantify a potential reward.
(and didn't want to derail his excellent thread)

 

[Kevin FD]

Exactly! The motivation for the post I linked to above was continuously hearing from members of the media - and otherwise ignorant sources - that the forex market is highly risky, or some variation thereof. They weren't saying "forex trading", which is an important distinction - though I would argue you can do a pretty good job of blowing yourself up in just about any market.

got some fine lines, thanks sir for your nice post. i always go through your post.

 

[tomorton]

As for the cross rates, GBP/NZD, GBP/AUD, GBP/CAD, and GBP/JPY are the pairs with the highest volatility. All of them move on average for more than 100 points per day.

Sheer volatility is not everything. The larger pairs move similar amounts (in terms of percentages to their own prices) but their spreads can be 2 or 3 or more times lower than the minors.

 

[Henow1969]

The Volatility in Forex is an important issue because of the fact that it is Volatility that serves as the life wire that makes the Forex Markets to be a great place to make Money in the first place. First of all, Volatility in the Forex Market entails the speed at which prices of Forex currency pairs movement changes in prices.

 

[NVP]

volatility is the oxygen of markets ....without it there is no action

 

[Kevin FD]

The Volatility in Forex is an important issue because of the fact that it is Volatility that serves as the life wire that makes the Forex Markets to be a great place to make Money in the first place. First of all, Volatility in the Forex Market entails the speed at which prices of Forex currency pairs movement changes in prices.

sometimes i feel this volatile and uncertain attitude make this market more attractive and excited even though because of this so many newcomers fall a great trouble when trading in a real account very fast.