EURUSD Historic Volatility Analysis

Whether you day trade the EURUSD, or some other pair, it is important to look at how volatile the pair is relative to its historical volatility. This is also important for swing trading the EURUSD. The EURUSD is the most heavily traded currency pair in the world. It is also the recommended pair for day trading because it has the most volume and usually the lowest spread out of the major currency pairs.

Often, when new traders begin trading a pair, they assume that whatever is happening now is what has always happened. And that the strategies that are working now will always work. It then comes as a surprise when conditions change and they start taking large losses, their strategies don't work anymore, and things they never imagined happening start happening.

Looking at a long-term view EURUSD can help us determine where we are in the volatility cycle. This lets us know what conditions are likely to be in the future. Will they be more volatile or less volatile? No matter what happens, we can start preparing ourselves for the change. We can consider how our trading will change if volatility expands or contracts.

One of the easiest ways to prepare for changes in volatility is to write down what your position size should be for your stop loss. Likely many traders have done this, yet probably only for the stop loss levels they are using right now.

For example, they may have their position sizes written down for a 4, 5, 6, 7, 8, 9, 10 pip stop loss. If volatility expands, like it has in the past, it is also worth knowing what your position size will be if your stop loss is 15, 18, or 25 pips. You may not think your stop loss will ever be that big, yet there have been times, like in 2008, when one-minute price bars on the EURUSD were easily moving 25 pips or more. Your stop loss would have needed to be at least that big, and may need to be again at some point.

During such volatile times it is hard to imagine that during low volatility times traders were using 3 or 4 pips stop losses (using a one-minute chart), like in 2014 and in 2019.

Trading can also prepare themselves mentally. How will they deal with the EURUSD when it is moving 200 pips per day? How will they deal with it when it is moving 100 pips a day? Or 45 pips per day? Start preparing before the changes happen.

So let's take a look back at what volatility has been like in the past.

EURUSD Historic Volatility Analysis

The following chart shows a EURUSD chart from 1997 to March of 2019. Some levels and ranges have been marked on the Average True Range (ATR) indicator. The ATR, on this chart, is measuring the weekly movement of the EURUSD (if applied to a daily or one-minute chart, it will tell how much the price typically moves over that time period).

Most day traders, or even swing traders, aren't too concerned with the weekly chart (yet they are worth learning how to trade), yet it does show how volatility can change, and that the environment you are currently trading in will likely change significantly at some point.

The black line at the bottom shows the lowest weekly movement we typically see is about 140 pips per week. This sort of low volatility is quite rare, and generally doesn't last that long...maybe several months.

Until 2017, the EURUSD's weekly movement hadn't spent much time below 200 pips per week. Between 2017 and 2019 the EURUSD has spent nearly all its time between 200 and 140 pips of weekly movement. This has been a period of very low volatility...one which will likely reverse at some point.

More typical volatility for the EURUSD is between 200 pips and 300 pips per week. Over the 22 years shown on the chart, the majority of the time was spent in this range.

A 300 to 400 pip range is quite volatile, but the EURUSD did stay in that range for some time too.

Anything above 400 pips per week is rare and relatively short-lived.

The Final Word on EURUSD Historic Volatility

Dig deeper. The analysis shows the basic volatility changes over more than 20 years, but you can dig deeper to prepare yourself for coming changes. Even most free charts provide daily EURUSD charts going back to 2000. Utilize them. Go back and look at what daily price movements were like in 2008, what they were like in 2010, 2014, 2016, and early 2019. These years were all very different, and they can all help you fortify and improve your strategies and mental game.

By Cory Mitchell, CMT