[JT1]

Hi

i dont know about anyone else, but i love this volatility. EURUSD is moving 40-50 pips in a matter of minutes/seconds. Today has seen a 400 pip downwards spiral.

EURUSD is behaving like cable used to before the volatility came about, and obviously this presents better profit potential.

I put this volatility down to the fact that due to the credit crunch, there are less interbank participants with less cash to splash, leading to less volume in the market, and as a result, the liquidity is thin, and price moves quickly.

Whereas a few months ago, before the crunch, the ranges were tighter, price movements were slower and smaller, due to the bigger volume/deeper liquidity & a greater number of interbank participants moving foreign exchange prices.

Assuming my theory is at least partially correct.....My question is -

Is this increased volatility likely to extend for some time yet, as the recession mounts & continues? Can we look forward to recent standards of volatity becoming the norm during the recession, & thus for the forseeable future?

Cheers.

[JT1]

Dam!

this forum is quiet!

[Soultrader]

Hi JT1,

Sorry I didnt notice this post till now. I share the same thoughts with you... there are fewer institutional traders due to the credit crunch. Also, banks have cut alot of their risks by diminishing position size. As a result we are seeing few lots per institutional trader causing the bid/ask to remain thinner than before. This causes price to jump easily.

For example Nikkei bid/ask used to be 1000 lots back in the late 80's. Since the bubble burst the bid/ask was down to around 200 - 300 lots. However, up until the credit crisis volatility was rather low compared to markets elsewhere. I think one of the elements that cause volatility is that what used to be dominated by big boys trading in lets say 100 lots... now you have the same traders trading in 20-30 lots while some are still trading in 100 lots. As a result, when the 100 lot trader comes into the market he can easily take out 4-5 levels on his own.

However, seeing the Nikkei stabilize since the crash (before the credit crunch) my assumption is that with enough time people adjust accordingly and volatility will go back to the norm. Im no expert in this field but since traders will reduce their position sizes accordingly to volatility.. I do think its only a matter of time before volatility settles.

[JT1]

Thanks ST.

I wonder if wer are likely to see some spot forex brokers will try widening the spreads, eg. saying that it is no longer feasible to offer a 2 pip eurusd spread, IF the current level of thin liquidity/volatility continues?

[zdo]

This isn't exactly FX related but since they are all so coupled up lately -

“The Volatility Index is at an important "Pivot Point". Yesterday, it closed on a critical 4 week support line...
time to pay close attention to what happens on the VIX. ...VIX has a correlation with the daily amount of Institutional Buying and Selling and more specifically ... the SPREAD distance between the two that occurs. So, the VIX's action will also be an indirect reflection of Institutional activity in the next two days…” Marty Chenard

Imo, the 'nervous breakdown' is not over, but the patient may be settling down enough to move from the crisis unit over to the regular psyche ward... don't be surprised by occasional episodic exacerbations though...

[Kiwi]

My own suspicion (for stock indexes) is that volatility will drop way back. STW is at getting down to half its peak price so even if nothing else happens you might suspect intraday range will scale down to half. SPI has had a nice range all year - but in 2002 it used to do 20-30 points a day. I like at least 60 pt daily ranges and would prefer 100 points.

So, I am collecting HSI data again (range got too large for me from August last year; but used to typically be under 200 points a day) and thinking about some 4 hourly forex pairs. A trader doesn't have to know what will happen - just how they will respond

[zdo]

Originally Posted by Kiwi »

My own suspicion (for stock indexes) is that volatility will drop way back. ... A trader doesn't have to know what will happen - just how they will respond

Yep - I reverted back to 'normal' platform / chart setups last Thursday at around noon for indexes... what a wonderful couple months it has been...

[DianaR]

It will probably be a year before we see the market settle down, and even then, we are going to see more fall out as the global depression works its way through each country.