Metatrader 4 has had an impact far more profound than you would expect from a simple piece of trading software. By streamlining and simplifying the trading process,
Metatrader 4 has made it possible for professionals to manage prosperous Forex careers from the comfort of their own homes. This accessibility has enabled the foreign exchange market to more than double its size in the last decade.
Let’s take a closer look at what makes Metatrader 4 such an overachiever. As stated above accessibility is what distinguishes Metatrader from its peers. The super simplified interface makes managing multiple accounts and analyzing Forex data a piece of cake. Another boon for new traders is the generous range of language options which has allowed Metatrader to penetrate a number of disparate markets.
Metatrader’s demo mode gives new traders a distinct advantage over previous generations in that they can now accurately test their strategies without risking a cent. Add to that a dizzying array of charts, graphs and Forex archives and it’s clear why new traders exhibit a far more impressive comprehension of Forex than their predecessors.
Another thing that Metatrader 4 managed to nail was reducing workloads considerably through automation. Many of the new online traders balance a career trading Forex with other obligations and greatly appreciate anything that enables them cut corners time-wise.
Metatrader’s electronic advisors do exactly that by automating the trading process. Instead of agonizing over every trade, confident traders can simply set parameters for when a trade can be made automatically, for example if the Euro drops below a certain value one can set the electronic advisors to start buying dollars.
Metatrader 4’s achievements are reflective of a larger sea change. As advances in IT allow for free, instantaneous communication around the world, previously passive consumers are developing a do-it-yourself attitude and are reaping massive rewards for their ingenuity. If you think you’ve got what it takes you owe it to yourself to put your ideas to the test and Metatrader 4 is just the tool to help you on your way.
This question has been raised by several market commentators, including The Wall Street Journal. Its recent analysis, entitled “Currency Investors: What, Me Worry?” wondered whether the
forex markets might not have become too complacent about risk and have seriously underestimated the possibility of another shock.
First, some basics. There are two principal volatility measurements: implied
volatility and realized volatility. The former is so-called because it must be deduced indirectly.A In the Black-Scholes model for pricing options, volatility is the only unknown variable and thus is implied by current market prices.A It serves as a proxy forA investor expectations for volatility over the period for which the option is valid.A Realized volatility isA of course the actual volatility that is observed inA currency markets, calculated based onA the size of fluctuations over a given period of time. When fluctuations are greater (whether upward or downward), volatility is said to be high.
A
For short time frames, implied volatility tends to be very close to realized volatility. For longer time-frames, however, this is not necessarily the case: “The long-dated implied volatilities are often driven to extreme values by one-sided demand or supply – the difference between implied and realised volatilities this causes is particularly large during periods of risk aversion in the market…making implied volatility a particularly poor proxy for realised volatility during periods of market unrest.” In practice, this is reflected by higher prices for long-dated put or call options (depending on the direction of the move that investors are trying to hedge against).
A
Indeed, most volatility metrics are well below their historical averages and are rapidly closing in on pre-credit crisis levels. This is true for the JP Morgan G7 3-month forex volatility index, the S&P VIX, as well as for specific currencies. Mataf.net (whose content manager I interviewed yesterday) contains replete short-term and long-term data for a few dozen currency pairs, and you canA see thatA almost all of themA feature the same downward trend. According toA the WSJ, “Investors believe there is a 66% chance each day for the next month that the euro and pound will move no more than 0.6% and 0.5%, respectivelya€”both limited moves.” In addition, “A gauge of the euro’s ‘realized’ volatility, which measures how much daily changes deviate from their recent average, is only 8.6%, lower than its 11% rolling one-year average.”
Of course, some commentators don’t see any problem here. They see it both as a positive indication that the markets have returned to normal following the financial crisis, and as a reflection of the correlation that has developed between stock prices and forex markets. (You can see from the chart below the strong inverse correlation between the S&P and the US dollar). According to Deutsche Bank, “Most news that should have shocked the market this year has not managed to do so for sufficiently long to make volatility rise sustainably. Our analytical models tell us that we are indeed moving to a low volatility environment again.”
A
On the other side of the debate is a growing consensus of investors that sees a pendulum that has swung too far. “I just don’t see how volatility will not increase quite substantially,” saidA one money manager. “There is significant potential for shocks to the system that currency volatility levels suggest the market is not prepared for,” added another, citingA higher commodities prices and inflation,A growingA public debt, and theA imminent end of the Fed’s QE2 monetary stimulus.
A
To be sure, volatility has started to tick up over the last month. This trend has also been reflected in options prices: “Many investors have avoided buying short-dated currency options this year, instead focusing on longer-dated protection, a phenomenon called a ‘steep volatility curve’…that trend has slowed a bit, with investors moving to hedge against near-term yen, euro and dollar swings.”
A
Currency traders should start to think about making a few adjustments. Those that think that volatility will continue to rise and/or that the markets are currently underpricing risk can employ a volatility strangle strategy, buying way out-of-the-money puts and calls. The options will pay off if there is a big move in either direction, with no downside risk. Those that think that volatility will continue decliningA or at leastA remain at current low levels can make use ofA the carry trade. Those pairs where interest rate differentials are highest and volatility levels are lowest represent the best candidates. BNP Paribas is also reportedly developing a product that will make it easier for traders to make volatility bets without having to rely on indirect means.
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