I’ve written about 10 versions of this story over the years, but given the extremes we’ve seen in recent months, I thought it was worth dusting off a familiar theme: Forex traders are never happy.
A year ago when volatility was at record lows it was “waa, waa, waa! It won’t move!” Now, a year later its “waa, waa, waa! It’s too volatile! Traders want a Goldilocks market: not too hot (like now) or too cold (last year). Back in the day when vols were low, buying enormous carry trades was the road to riches. Even if the underlying trade didn’t move you’d pick up 500 or 600 basis points a day in carry. Guys still playing that game are being carried out and their positions liquidated by their creditors.
So here we are, at elevated levels of volatility. Historically we’re at the upper end of the volatility scale. With any luck we will revert to average levels in the months ahead as credit markets thaw and equities lose their stench.
When 1 month at-the-money volatility is down to 10% or so, Goldilocks will be back. At 22% like today, she is a long way away. Keep positions small and stops generous and avoid the temptation to try and scalp the market for pips. It is just too volatile to make that pay.
