What can we do about this low volatility?

A lack of investor commitment will keeps vols stuck to the floor

We’ve been talking a lot in our trading room about the dropping volatility in forex markets, and what that means for our trading. With volatility at historically low levels, it’s sucking the life out some of the key pairs. I touched on the vol levels for USDJPY and EURUSD in a video yesterday and those vols are even lower today.

There’s two key reasons for the lower volatility.

Major central bank normalisation
Global worries over trade, China and Brexit

Both these events are causing investors to pause and consider their options.

For the central bank reason, you have to understand that we’ve come off a period of massive volatility during the GFC and huge central bank interventions. The market has had trouble adjusting to normality where central bank moves aren’t chucking more billions around each month but are just tinkering with rates. Many of us older folks know about life before the crisis but there are plenty of traders, investors and market players who came in or grew up during the crisis, and subsequent aftermath, and high volatility has been their only experience.

Global events currently brewing in the pot also have investors sitting on their hands. Again, this is a subject that comes up repeatedly in our trading room discussions because it’s a big part of how we look at markets and plan trades. Investors don’t like uncertainty, they like nice straight paths to their investment goals. The don’t mind the odd speed bump but they don’t like brick walls.

What does it all mean?

The long and short is that if investors are sitting on their hands, money isn’t moving around, so market volatility drops if there are no clear trends or paths to follow. Investors would rather stay out or park their money in safer but lower yielding assets to ride things out. Many just sit on the cash. The weird thing is, that this inaction actually causes some additional short-term volatility because all the investment fund managers then have to scramble around trying to find the best vehicles to coax investors cash into investments, as they need to make money too. The evidence that things are becoming difficult in the investment space is evident when we get stories of decades old funds closing down. That can cause short-term higher vol moves in certain assets because those assets see short-term hits of movement. It leads to a lot more quick shifting out of different asset classes as funds go chasing incremental increases in yields. For example, if fund managers have money in one bond yielding 0.6% and suddenly there’s another that can earn 0.8%, they’re going to go chasing it.

This isn’t all conjecture and speculation, TD have a note out today after they went on a road trip visiting customers over the last two weeks. There are two key observations that sum up the above exactly;

Clients are reluctant to engage in strategic long term directional trades. This has led to an increased preference for relative value, taking the USD out of the picture.

Clients are trying to gauge the timing of a bottoming in China’s growth cycle, and attempting to determine what “green shoots” to look for.

How does all this affect our trading?

We forex traders are suffering also. With the exception of GBP, other currencies are all suffering with lower vols, with USDJPY and EURUSD suffering the most. As these are the most traded pairs, if they suffer from low volatility, the rest are affected by proxy. How long has EURUSD been trading 1.13-1.14, in the middle of the wider 1.12-1.15 range, or USDJPY 110-112, in the middle of the wider 108-114 range?

As traders, we have to adjust to market conditions. It’s folly to buy EURUSD at 1.1300 and set a 1.18 target, or sell USDJPY at 112 and believe you’re going to get 109 in a week. We have to trade how the market trades and that means scaling down our expectations and if necessary, our trade sizes. We have to think about, and use, shorter-term strategies. We have to squeeze out the pips as much and as far as we can while keeping risk as low as possible and removing it as quickly as possible. That may be difficult for some of you because you may have also started trading through the high volatility times and now you’re struggling to get 10 pips out of a trade. I’ve seen how some of our traders in our trading room have had to adjust. I’ve had to adjust as have many other experienced traders. I can no longer look at trades longer than a few hours or a day. There are no real trends so I’m more reliant on the lower time frames and intraday levels, unless we hit some of the larger and wider ranges. I’m now happy to get in a trade and take partial profit after 10/15/20 pips because then I can lock in the stop on the rest to BE or better and then try and squeeze as much as I can out of the rest. I have no thought for trying to get 100+ pips out of a trade, I’m now happy to take 20-50, if i can get it.

This where being part of a great trading community helps immensely. Our trading room is a place where traders can air their frustrations and get proper advice. It’s where the more experienced traders like Dubsly, Kman and myself can see and feel the issues facing other traders and can help guide them but it’s also where we can take guidance too. It’s where we can set out our trades and ideas, assess the price action and make the best trading decisions we can. More importantly, it’s where we can avoid making silly trades born out of frustration at a lack of action in markets.

Volatility will always come and go but experience is something that lasts forever, so if you’e struggling to come to terms with the market and how to trade it, or if you just want to be surrounded by other traders who have or are going through the same thing as you, or even if you have plenty of experience but just want some additional confirmation that what you’re doing is right, why not come and pay a visit to our trading platform and see how it can help you.