The Basics

Ever Increasing Volatility in Forex

I came across a post in one of the groups on LinkedIn in which the author described the volatility in the forex market as “ever increasing”. That was a major case of hyperbole for someone clearly making a sales pitch of some point. I challenged him on the metric and 1-year standard deviation was suggested by someone else. I did a volatility comparison between markets a few months back which showed how low the volatility in forex is relative to other markets, but that only looked at 1 year worth of data. Let’s see what the patterns look like going back further.

I’ll look at the major pairs going back to the 1999 launch of the euro. Here’s a chart showing the trailing 1 year standard deviation of closing price. For ready comparison it divides the standard deviation of the last year’s worth of closing prices and divides it by the average closing price of that same period.

As we can see, volatility in the major currency pairs is hardly “ever increasing”. It most definitely spiked up during the financial crisis, but now it’s back down to its more normal range. USD/CAD volatility by this metric is actually lingering down near the bottom of its range for the study period.

Here’s a second way of looking at volatility – average daily range. This chart plots the running 1 year average daily range ( expressed as H-L/((H+L)/2) ).

Again, here we can see the impact of the financial crisis on daily ranges. And again we can see how the average daily range has been working back to more normal levels. It’s still running a bit high, but not outside the prior range.

So in other words, volatility is far from ever increasing.

By John

Author of The Essentials of Trading

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