Analyzing EUR/USD Volatility for Day Trading Purposes

Cory Mitchell, CMT

The 10-week average for daily movement (high minus low) in the EURUSD is 43 pips. That's the average daily range for the most heavily traded currency pair in the world. 

Over the last 10 years, the daily average range has spent most of its time above 60 pips, and has even spent considerable time above 100 pips. 

Near the start of 2019, the EURUSD dropped below that 60 pip level and has mostly stayed there. For many traders, this has made day trading the EURUSD more difficult (compared to the past) because there is less movement to capture. It is harder to jump into and out of trades with a profit when accounting for the spread and commissions. 

This has been somewhat offset by some brokers offering lower spreads, such as 0.1 pips. The spread with one of my brokers is typically 0.1 pips, which makes it easier to capture even small moves. Trading with a larger spread means putting yourself at a significant disadvantage. 

I wanted to discuss volatility and day trading because it can have a big effect on how we trade and our profitability. Also, new traders probably don't know that this pair has historically traded very differently, and possibly traders that have been around for at least a few years may be struggling with the steady decline in volatility.

So let's look at how EURUSD volatility is now, and how we can use those statistics to aid our trading.

EURUSD Volatility by Day of the Week and Hour of Day

First, let's look at volatility by hour of the day. This chart is in GMT time. Adjust to your own time zone accordingly.

The hours with the most movement are from 0700 to 1600. This corresponds with the London market. There is an uptick in activity when the New York session kicks at 1300.

Volatility by hour of day in the EURUSD Jan 24 2020
Times in GMT.Mataf.net

If you are after movement, trading should be done between 0700 and 1600.

The day of the week sometimes matters, but recently not so much. During some periods certain days of the week tend to be much quieter than others. Therefore, it is worthwhile to check the stats periodically.

Here is the data over the past five weeks. Mondays and Wednesdays have had less movement than the other days, and Fridays have had the most.

EURUSD volatility by day of week 5-week average Jan 24 2020
5-Week AverageMataf.net

The 10-week average still has Friday as the movement leader, but the other days show similar volatility.

EURUSD 10-week average of volatility by day of week
10-Week AverageMataf.net

Factoring Volatility Into Trading

If things are working for you, don't change anything. Don't fix it if it isn't broken.

If you have been struggling with your EURUSD day trading, make sure you are using a low spread broker. This on its own can make a big difference.

Next, consider the range already in place when you start trading. If you are trading the US session and the price has already trended higher by 60 pips, and you are buying expecting it to go another 10 or 15 pips, you're fighting against the averages. Remember, on Monday to Thursday—over the last several weeks—the price has only moved on average 40 pips.

While certain days will certainly exceed the average in terms of movement, some days will be less. If you are trading every day (or almost every day) keep your expectations within the averages. Focus on trends that are in play inside the averages. Don't take trades expecting the price to make a big move outside the averages. For further reading on this, see the Daily Range Day Trading Strategy.

Mark the high and the low, so far in the day, on the chart. Typically this distance is going to be 60 pips or less (in current conditions). If the high and low are already 60 pips or more apart, targets placed outside that range have less chance of being hit. Of course, each trade has its own odds of success, but overall it is important to keep the context of volatility in mind. 

I also like to set the y-axis of my charting platform to whatever the daily range is, plus a small buffer. So right now, the y-axis should cover an approximate 50 pip area. This creates a visual baseline each day. If the pair has only moved 10 pips during the day, the y-axis will typically only show 10 pips, making it look like there is lots of movement and nice trends. But this is a visual illusion. If you keep your scale at 50 pips you will be able to instantly see if this is a typical day or if volatility is lower or higher than normal.

EURUSD Y-axis Set to Certain Level for Day Trading
MetaTrader4

If volatility is higher on a particular day, I will expand the y-axis to include all the day's price action. But I don't shrink the y-axis below 50 pips. I do this so I don't even bother trading if the daily trading range is small. Small trading ranges don't suit my trending day trading style. If the price action only takes up a tiny portion of the 50-pip screen, and the price action looks all tiny and squished, I instantly know the day is not worth day trading (for me) unless the daily range starts to expand.

Day Trading the EURUSD

If you have gotten used to trading in this ultra-low EURUSD volatility, know that historically the pair has been more volatile. Start preparing now for if more volatility returns. 

If you have struggled in the low volatility environment, there are still profits there. But that may mean not trading some days. Get a low spread broker, stay within the daily movement averages, and always start the day with your y-axis at a certain height to provide a visual baseline of whether there is decent movement or not.

By Cory Mitchell, CMT. Join me on Twitter @corymitc.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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