The other day I commented on a post on a personal finance blog. The article was an introduction to forex. I won’t link to it here because it was very poorly done, falling short on many points. One of the things that tripped off alarm bells early on about where the post was going was this statement:
However, it is important to note that forex trading is rather risky, and the currency market is quite volatile.
All trading is rather risky, so I won’t address that particular point. I will, however, speak to the issue of the currency market being quite volatile. Statements about the forex market being more volatile than others are made all the time – almost always by folks who are putting forex trading down in some fashion or another. As I’m going to show you, the numbers make it pretty clear that forex is in fact on the low end of the volatility scale when looking at all markets.
Here is a look at the last year worth of volatility in forex rates
|Pair||Daily StdDev||Avg Daily Rng|
The first column is the standard deviation (a commonly used volatility metric) of the daily % change for the one-year period beginning November 1, 2008. The second column is the average daily range, with each day’s range being expressed as a % of the prior day’s close ( [H-L]/C ). I went with % changes and ranges to make things directly comparable across markets. So from this data we can see that USD/CAD tends to see the biggest daily changes, though GBP/USD tends to have slightly wider daily ranges.
Now let’s compare that to the major US stock indices.
|Index||Daily StdDev||Avg Daily Rng|
Here we can see about what as we would expect in terms of the small cap Russell index being the most volatile in terms of both price changes and ranges.
And how about individual stocks?
|Stock||Daily StdDev||Avg Daily Rng|
All of the above are clearly large-cap stocks which would generally be expected to show less volatility than mid- or small-cap stocks (as witnessed by the higher volatility in the Russell index). Even still, with the exception of KO, they are all much more volatile than the forex pairs.
So what about commodities?
|Commodity||Daily StdDev||Avg Daily Rng|
Again, the commodities are clearly much more volatile on a day-to-day basis than are forex rates.
Now to add in a market that’s considered the least risky by many folks – interest rates.
|Instrument||Daily StdDev||Avg Daily Rng|
|2yr Treasury Note||0.13%||0.18%|
|10yr Treasury Note||0.63%||0.92%|
|30yr Treasury Bond||0.99%||1.50%|
I’m using the futures for the prices above. Finally we have a market where volatility is lower than forex! As you can see, the shorter maturity instruments (Eurodollars are 3mo) are calm compared to the others we’ve looked at here. Bonds, though, are in line with the volatility readings we see for the forex pairs.
So the bottom line is that not only are forex prices NOT the most volatile, they are actually on the lower end of the spectrum when looking at available markets. The numbers demonstrate it pretty clearly, even in a 12-month period which has seen its fair share of volatile trading.
Now granted, the application of leverage in forex creates the opportunity for very high levels of volatility in one’s trading account – but that’s not the market’s fault. Traders don’t need to use leverage. You can trade forex without it.