Home > Dealing with Decreasing Forex Volatility When Day Trading

Dealing with Decreasing Forex Volatility When Day Trading

As a day trader, nothing remains static for long. Just as you get used to some volatility, things become more sedate. Just as you are starting to get comfortable capitalizing on smaller movements, volatility increases. Changes in how much a currency pair is moving can throw you off your game. Many forex traders don’t even monitor volatility, which means they may be applying the wrong strategies at the wrong time.

The most popular forex pair is the EURUSD, and is the pair I usually recommend for day trading.

The EURUSD has long been one of my staple day trading forex pairs, although figure 1 shows how volatility has changed over the last few years. Resources for tracking volatility are provided on the Daily Forex Stats page.

Figure 1. EURUSD Long-Term Volatility as of Dec. 12, 2017

eurusd historic volatility

The decrease in volatility leaves a smaller margin of error for day traders. When the EURUSD is moving 130 pips a day it is much easier to step in and grab a quick 20 pips a number of times. When the pair is moving 70 pips per day, this is more difficult. Figure 1 shows that volatility at the end of 2017 is near its lowest levels in 8 years, hovering at about 65 pips per day. Volatility was even lower in 2014, with daily movement averaging only about 50 pips per day at its lowest point (10-week average).

These long-term swings in volatility affect traders, and especially day traders. When volatility is lower, the average number of pips made on a trade is typically less as well. The fewer pips made, the more impact the spread and commissions have. And the smaller the moves are, the easier it is to get suckered into what looks like a strong trend but really there is no momentum there at all. For example, if the price has been moving slowly recently, most charts automatically zoom in to show you the high and low over the period being viewed. This can make a 10 pip move appear huge.

We can see this happening on the chart below. The MT4 chart automatically zooms in to only show the recent price action. If you aren’t paying attention to how big the price waves are (and your y-axis) you may feel compelled to jump in.

Figure 2. EURUSD 1-Minute Chart Using Default Price Scale (zooms in to fit high and low)

eurusd price chart unscaled

Source: My Forex Broker FXopen

Yet the price action isn’t as compelling as it appears. Most of these price waves are only 5 or 6 pips. Trying to make 5 or 6 pips profits is fairly tough when you account for the spread and commissions. You need to be very precise. It is much easier to trade when price waves are 20 pips and you are only trying to nab 12 to 15…much more room for error there. Notice that the scale on the y-axis, in Figure 2, only covers 18 pips.

If you always keep your y-axis on your day trading chart to 60 pips, you will see that the move is basically inconsequential when looking at the movement from a standardized perspective (I discuss some other trading “hacks” like this on my Day Trading Cheat Sheet).

We can instantly see we probably shouldn’t be trading during this time as the price is barely moving.

By the way, you notice the color coding on the charts. That is a session highlighter, which shows when various markets are open. You can get the indicator here.

Figure 3. EURUSD 1-Minute Chart With Y-Axis Adjusted to 60 Pips

EURUSD price scaled

Source: My Forex Broker FXopen

The point is, it’s important to be aware of what volatility is doing overall and intraday. We can keep track of overall volatility by referring to a historic volatility chart, like Figure 1, from time to time. Each day, we can maintain some perspective on volatility by always being aware of how many pips our y-axis is showing. I typically like to keep mine at about 60 pips or more (the exact number isn’t important, rather I just like using the same figure each day). Less than that and inconsequential moves can start to look big and inviting, when in fact they are quite small. I will also measure price waves to make sure they give me a decent margin of error for the profit target I am aiming for.

Being of aware of volatility is one thing, and having that awareness should help you better assess when to trade and when not to. But what should you do if a pair you have been trading doesn’t have enough volatility to warrant trading? Well, even with only 65 pips of movement, the EURUSD typically still produces at least a few solid day trading opportunities within the London session and overlap period. But if it is a really quiet day, and you aren’t seeing much in the EURUSD worth day trading, there are some other options.

The Alternate Day Trading Pair

When the EURUSD isn’t moving to my satisfaction, I typically look to the GBPUSD. While the EURUSD and GBPUSD often do share a high correlation, they don’t always move together, and one usually has more movement than the other at any given time. In 2017, volatility in the GBPUSD is higher than in the EURUSD. GBPUSD daily movement is above 100 pips.

Figure 4. GBPUSD Long-Term Volatility as of Dec. 12, 2017

GBPUSD historic volatility

Be aware of your surroundings. If you are trading something that consistently doesn’t produce a lot of opportunities, look for opportunity in a close alternative. Sometimes volatility will be low in both the GBPUSD and EURUSD, but between the two you should be able to find ample trading opportunities each day. And if there is the odd day where you just don’t see anything, that’s fine too. Don’t trade that day. Save your money for a day when there is opportunity.

Alternate Trading Style

I started out my career day trading, and started swing trading during an especially quiet time in the market (this was many years ago). During this time not a lot was moving, yet I was still sitting in front of my charts all day waiting for something to happen. The movements weren’t big enough to warrant day trading, but over several days or a few weeks there was lots of profit potential. I starting incorporating some swing trades to increase my income during this quiet time, and I have never stopped. Whether day trading is going well, or whether it is a quiet time, adding in swing trading can increase overall trading income.

What I like about swing trading is that I can trade loads of forex pairs. With day trading I prefer to focus on just one (or two) at a time, but with swing trading, I can easily scan for trades in more than 40 pairs a night. And swing trading takes up little time. I can find trades and place orders in about 20 minutes or less each night.

Over the years I have even taken swing trading a step further. I started also trading weekly charts, which I only check once per week. In about 20 minutes each weekend I find and place longer-term trades. This further increases the earnings potential from the forex market, and serves to provide income when day trading revenues are lower.

I find the volatility doesn’t affect the swing trading as much. Because there are so many pairs to choose from, there is usually good trades out there somewhere.

When volatility is high, I certainly do focus more on day trading, but I still place my swing trades because it is an additional revenue stream which doesn’t take up a lot time.

Final Word

There are no excuses. Sometimes trading is tough, and sometimes it is easier. As traders, we need to take it all and find a way to work with it. We can adapt, or we can simply opt not to trade when conditions aren’t that great. There are always opportunities, though, even when volatility is low. There are no excuses. The one thing not to do is to try to force a strategy on a market that is no longer receptive. It is better not to trade than to waste money. There are always options and profits to be had. The profits may come from slightly altering a strategy to accommodate current conditions, or they may come from trading another pair, or they may come from placing more focus on a different time frame.

By Cory Mitchell, CMT

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