How did Forex change so much from 2008 till now

[Robertwiz]

Hello,

I traded forex back in 2009 to 2010. Additionally, I did some chart studies from 2006 too 2008 and I have noticed the following:

From 2006 too 2011, there have been in currencies such as the EUR/USD and the GPD/USD that offered easy intraday juicy trends at least twice a week. for instance 250 pips from 9 AM to 12 PM.

In other words for forex such as GPD/USD or EUR/USD, the markets had plenty of 100 pip moves within short three hour sessions. They were also technically easy to trade. This happened two years before the 2008 GFC and two years after.

Today:

Forex products such as Eur/usd and gpd/usd have SIGNIFICANTLY smaller ranges Even a 70 pip move during the 9 AM EST to 12 PM EST session is a rarity.

Additionally, the charts look ugly and choppy and are much more difficult to trade technically.

So, my questions are the following:

1.How did Forex go from being the land of juicy to 150 pip two hour moves to a weak range chop shop?

2. Were there any warning signs?

3. Might the days of the easy money return?

Thanks

 

[achilles28]

Yup. I agree.

I think it comes down to volatility contraction and the domination of HFT bots/algos.

Can you post some charts from 2006-07?

Interesting, Government intervention calms volatility. FX (and other markets) are naturally trending towards an equity collapse/risk-off/high volatility environment. Central Bankers, armed with QE, step in routinely, and stave off the inevitable collapse. If you pull a chart of the historical VIX, you can pinpoint spikes and sell-offs where the market wanted to dump, followed quickly by bureaucrats who propped, followed by a VIX sell-off.

 

[Peternam]

Will volatility ever return ?

 

[MKTrader]

While markets are ever-changing, there is a lot of exagerration in this.

I traded in 2006, and the ADR was down to 50 pips at times (look at charts around October of that year). It was worse than it is now. That's when "grid trading" took off, as well as other counter-trend strategies. The early trend-following and breakout strategies that drew many into FX circa 2003-2004 died a painful death.

Vol went on to peak in 2008 during the crisis, and has been all over the place since then.

If there were really multi-year periods where 250-pip moves occurred on a daily basis, we'd have a lot more FX millionaires/billionaires walking around.

 

[denner]

Quote from achilles28:

Yup. I agree.

I think it comes down to volatility contraction and the domination of HFT bots/algos.

Can you post some charts from 2006-07?

Interesting, Government intervention calms volatility. FX (and other markets) are naturally trending towards an equity collapse/risk-off/high volatility environment. Central Bankers, armed with QE, step in routinely, and stave off the inevitable collapse. If you pull a chart of the historical VIX, you can pinpoint spikes and sell-offs where the market wanted to dump, followed quickly by bureaucrats who propped, followed by a VIX sell-off.

Good synopsis.

 

[denner]

Quote from Peternam:

Will volatility ever return ?

Of course it will, but it will be pandemonium. I think of it more akin to "instant re-pricing", not the sort of tradeable volatility that we saw a decade or so ago.

Since the bureaucrats have essentially "become the markets". i.e. whatever rumor they want to release at any times to move the markets...well it takes away natural liquidity (of course HFT has done a bang up job of that as well). So now the markets essentially subsist purely off of whatever "political fix" can be had for tomorrow or next week. There is no "long term plan".

 

[MKTrader]

Quote from Tango 6 Alpha:


Will we see pre-2008 volatility return to the EUR and the GBP? Yes. Will it happen first thing Monday morning? No. Will the EUR Dollar go away, or get burned to the ground? Of course, not. Will the Sterling get folded into the EUR Dollar? Absolutely, not. Will Greece, get the boot? Of course, not.

What pre-2008 volatility? Here's the 250-day ATR (about 1 year of trading, taking out weekends and holidays) taken on the last day of each year since 2004:

2004: 124 pips
2005: 109 pips
2006: 94 pips
2007: 82 pips
2008: 188 pips
2009: 164 pips
2010: 151 pips
2011: 158 pips

As I said earlier, volatility peaked in 2008 with the crisis, but was at its lowest levels in 2006-2007. Anyone trying to make easy money on a mythical 250-pip move during the NY/London session would've been eaten alive. Some tried. There were a bunch of vol breakout strategies like "Big Ben" that tried to exploit big moves during peak hours. But to my knowledge, none fared any better than break even over the long run.

 

[MKTrader]

Quote from denner:

Of course it will, but it will be pandemonium. I think of it more akin to "instant re-pricing", not the sort of tradeable volatility that we saw a decade or so ago.

Since the bureaucrats have essentially "become the markets". i.e. whatever rumor they want to release at any times to move the markets...well it takes away natural liquidity (of course HFT has done a bang up job of that as well). So now the markets essentially subsist purely off of whatever "political fix" can be had for tomorrow or next week. There is no "long term plan".

I agree, but I think this has affected equities more than FX. In years past, stocks would already be pricing in the coming "Taxegeddon" in 2013, or the fiscal spending/debt cliff. Now these things only matter for a few days when there's a media circus about a debt ceiling--which soon gets overshadowed by the latest on Lady Gaga or Michelle Obama's dress.

On the other hand, when some EuroNut announces that "Greece/Spain is in good shape due to the latest bailout/plan....at least for the next two weeks," the S&P gains 2% for five straight days.

 

[achilles28]

Quote from denner:

Of course it will, but it will be pandemonium. I think of it more akin to "instant re-pricing", not the sort of tradeable volatility that we saw a decade or so ago.

Since the bureaucrats have essentially "become the markets". i.e. whatever rumor they want to release at any times to move the markets...well it takes away natural liquidity (of course HFT has done a bang up job of that as well). So now the markets essentially subsist purely off of whatever "political fix" can be had for tomorrow or next week. There is no "long term plan".

Agreed. Zerohedge analyzed volatility distributions over the past several years and characterized the recent environment as skewed towards the extremes. By that, the vast majority of days are tight, mean-reversion slop, sparsely punctuated with huge volatility. There isn't much middle ground, anymore (nice, clean trends, with decent volatility). It's one or the other (flat-line or huge moves). Most currencies have been shit, of late. We got a couple good days last week in the euro, but that was well outside the norm. ADR numbers paint an inaccurate picture because they average a series of values. But it's the distribution of that series, that is more important to a trader. For example, the average week looks like 3 or 4 x 60 pip sessions punctuated with 1 or 2 x 150 pip sessions. The average (~100 pips) gives the illusion of a trending environment, but that's not the case. Most of these big range days (save last week), happen on news (big, untradable spike, followed by some nice volatility, then a resumption to flat-line). The ideal condition is *consistent* volatility. It doesn't even have to be high. But I'd take a consistent 90-100 pip daily range in the Euro over the crap we've seen of late. Crude oil is really the only market that moves worth a darn anymore.

 

[magister]

Do notice however, although the euro session is definately not what it used to be, about roughly 1-2 hours after the US market opens at 9:30 AM EST, you often see strong powerful momentum come into the market, seeing forex pairs break thru major support/resistances, fibs, trendlines, etc.

Buy low and selling high goes out the door and during these phases one really has to get into the mindset of buying high and selling higher. Sometimes it starts a bit earlier like 15 minutes after the open, other days it takes 2 hours, somedays it just does not materlise, but it was happening at least twice a week...well at least before the summer doldrums really set in.