Rhody Trader

Adam at the Forex Blog posted some stats on currency trading popularity. In it he cited an article by my employer (the news side of it, anyway) - Small investors flock to forex trading amid crisis - which talks about how retail traders have flowed into the forex market of late. The credit for this migration is being given to the volatility (especially to the downside) in stocks, emerging markets, and all those other places folks have liked so much until recently. Some of the figures noted in terms of account and transaction growth among forex brokers are quite sizeable.

Those of us who have been around for a while recall the same sort of thing happening in the post-tech bubble period, which is when retail foreign exchange trading really came into its own. At that point ETFs weren’t nearly as popular as they are now, so there were few alternatives to small traders outside individual stocks. Forex became the place to go for those who no longer wanted exposure to corporate misdeeds and such.

Of course forex also has its own cycles. There were a lot of forex traders who were quite happy and successful during the middle part of this decade when volatility was low and falling. They had developed strategies based on ranges and mean reversion types of strategies that worked well in low volatility environments. The forum sites has loads of discussions about “grid” and “hedge” systems.

As you can see in this weekly EUR/USD chart, that low volatility went away in a hurry in 2007. (Red line shows Normalized Average True Range, a measure of period range volatilty – higher levels mean wider period ranges).

If you frequent the trading forums these days those “grid” and “hedge” type strategies are barely mentioned any more. It’s pretty easy to come to the conclusion that those who were using them fell victim to the increased volatility and more directional market moves. At this point we seem to be shifting from a high volatility environment back toward something lower once more. It’s going to be interesting to see what sort of implication that has for the current new generation of retail forex traders.

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