The Basics

Looking at Volatility Across Markets

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
EUR/USD 0.93% 1.41%
USD/JPY 0.91% 1.45%
GBP/USD 1.00% 1.65%
USD/CAD 1.02% 1.60%

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
Dow 2.01% 2.41%
S&P 500 2.26% 2.60%
NASDAQ 100 2.18% 2.69%
Russell 2000 2.89% 3.28%

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
IBM 2.18% 2.85%
GE 4.20% 5.59%
AAPL 2.66% 3.44%
GOOG 2.51% 3.33%
AMGN 2.33% 3.03%
XOM 5.95% 6.66%
JPM 2.23% 2.88%
KO 1.74% 2.45%

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
Gold 1.61% 2.38%
Oil 4.35% 6.01%
Nat Gas 4.91% 6.54%
Corn 2.70% 3.83%

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
Eurodollar 0.05% 0.06%
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.

19 replies on “Looking at Volatility Across Markets”

I hope you can clarify whether my point is valid, but isn’t the problem for traders (forex players can’t really be called “investors”, can they?) that the overall volatility isn’t the issue.

For instance, if your forex position moves just 0.01 points against you and you’re now down US$5000, the fact that the overall volatility compared to stocks doesn’t matter, for the equivalent move in a stock would make you down just a penny.

So its the cost to you of equivalent point moves that matters, not the overall volatility that the chart moves through on a daily or monthly basis.

Is that the correct?

A most interesting post, nonetheless, which nails the lie that to a statistician, forex prices are indeed less volatile, but despite this we always seem to get racked with high losses, as the cost per point move is so much more magnified.

Or maybe I’ve got it totally wrong.


CamKC – The difference in pip/point/tick values between forex and other markets is a function of position size. Naturally the value of a tick for a $100,000 position in USD/JPY is going to be higher than for a $1000 position in IBM. That’s why I made the point about account volatility as opposed to price volatility. If you were trading the same position size you would expect smaller variance in forex positions than in most other markets.

The problem is forex traders are out there employing big leverage. They don’t have to, but they’re too busy thinking in terms of how much they could make rather than how much they could lose.

My point is that forex traders are not forced to traded at higher point values. Given the number of different options available for trades sizes, there really is no excuse for someone to trade too big relative to their account balance and put themself in the position to be losing so much on a tick by tick basis.

I thank you for your clarity. We are subject to lots of misinformation by financial service providers who want to steer us to their offerings so they can earn fat fees by preying on our ignorance and fear.
I will recommence learning the essentials of trading with oanda.
I was sidetracked watching J Murphy’s presentation, which I felt was qualitative more than quantitative.
as a 59 year old newbie, I need to pace myself and concentrate only on the essentials as I tire easily.

Peccadilloes – Concentrating is a good idea for anyone in this game. New traders have a habit of being quite scattershot when it comes to their early development. They jump from one thing to the next when they don’t see the immediate results they want. That’s one of the things I tried to address in the way I developed my book. I’ve actually been accused of sucking the fun out of the subject because I dared try to get my readers to approaching things in a structured fashion. 🙂

It’s ironical that those making such accusations end up being “suckers” !

“New traders have a habit of being quite scattershot when it comes to their early development”. Exactly my experience.

Very advisable to “concentrate” on the essentials. Things have changed for the better since I did.

Great stuff on market volatility. Thanks.

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