Based on several indexes, volatility in forex markets is nearing historic lows. How can this be explained, given the enormous daily swings in equity and bond markets? The first explanation is that business cycles, and by extension, monetary policies, are gradually synchronizing across the industrialized world, especially among the USA, EU, and Japan. When inflation rates and interest rates are similar across different countries, this mitigates any theoretical need for changes in exchange rates. The second explanation is that the tremendous growth in forex volume ($3 Trillion per day and rising) is increasing liquidity and lowering volatility.
More importantly, is it possible to profit in a climate where volatility is lacking? The answer is "of course." It simply involves a shift in strategy. When volatility is high, trading is usually the most profitable strategy: using technical analysis and churning your "portfolio" on a daily basis. On the other hand, when volatility is low, then trending is probably the best bet. Don't forget: volatility is not the same as directional movement. If a currency appreciates every day by only a small increment and without any wild swings, volatility is low but the profit potential is high.
Read More: Making the Most of a Benign Environment
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