IG Index have brought good news to a lot of forex traders this week with the announcement that they are cutting spreads on many different currency pairs once more. They were already really competitive, but now you will be hard pushed to find a spread betting firm or forex broker that offers tighter spreads.
For example the dealing spreads for the EUR/USD and USD/JPY pairs start at 0.8 pips, whilst the spread for the GBP/USD and EUR/GBP pairs start at 1 pip. This is a big improvement because I've used IG Index to trade these pairs with a spread of 2 or 3 pips in the past.
The only downside is that these low spreads are not fixed at this level all the time. For example I've just spent the last minute watching the GBP/USD spread, and although the spread often stays at 1 pip with every tick, it sometimes goes up to 2.5 pips.
Overall, though, it is still a very welcome announcement because I use IG Index quite a lot, and I know quite a few people who read this blog use them as well.
Another year is coming to an end and I think it's fair to say that in general it's been a really tough one for a lot of forex traders. I have certainly found it quite hard to make money in recent months. Indeed I haven't traded at all for several weeks now as I'm taking an extended break from forex trading at the moment.
So let's look back at three of the most important currency pairs – the GBP/USD, EUR/USD and USD/JPY pairs – and I will try and explain why these pairs have been so hard to trade this year.
GBP/USD:
If you look back at the price action for the GBP/USD pair, you will see that it is now pretty much back where it started back in January. The price did manage to go as high as 1.6747 at the end of April, but broadly speaking, it has been trading sideways for most of the year with no clear trend. In the autumn and winter months, the price has fallen slightly as the news coming out of Europe continues to worsen, but it is still not in any major downward trend.
The frustrating thing about this pair is that the daily trading range has been very small compared to previous years. Whereas the ATR indicator (indicating the average true range) has been closer to 200, this year it hasn't gone above 150, and has been much lower than this for most of the year. At the moment it is a pitiful 112 points.
EUR/USD:
The EUR/USD pair has of course been a lot more lively because the Eurozone crisis directly affects this pair most of all. As a result we have had a yearly trading range of more than 2000 points. There was a decent upward trend in the first five months of the year, when there were some decent profits to be made, but since then there has been a lot of uncertainty, and subsequently a lot of sideways price action.
At the moment there is a downward bias and it is getting close to the low that was posted at the start of the year. However it is still really hard to trade because we are still at the mercy of the European politicians.
USD/JPY:
The USD/JPY pair was one of the main pairs that I based my 4 hour trading strategy on. However this pair hasn't been that consistent this year, and I subsequently only traded it on a few occasions.
This pair was actually very lively in the first half of the year, however in the last six months it seems to be forming a solid base from which to build. It has drifted downwards and remained within a tight 200 point trading range.
It is now looking as if it is finally going to break upwards out of this range, but it certainly hasn't been easy to trade in the meantime because the average daily trading range has been less than 70 points for large parts of the year (at the moment it's just 37 points), and there has been no real trend in recent months.
Final Thoughts:
So as I say, it has been a challenging year in 2011 for many forex traders, including myself. The easiest markets to trade are trending markets, but there are no real trends at the present time.
In my case my 4 hour trading system relies on clearly defined trends on the daily chart, so that the EMA crossovers on the 4 hour chart are highly likely to generate decent returns on a consistent basis. However when the short term trends are weak on the daily chart, it makes things very difficult.
Hopefully the Eurozone crisis will be resolved one way or the other in the coming months, and 2012 will be a much more profitable year for all of us.
I stopped trading the USD/JPY last year because it was proving to be very difficult and the big price swings were becoming less and less frequent. Well the bad news is that it seems to have got even worse in 2012, and the USD/JPY pair looks as if it is on a life support machine at the moment.
For this reason I don't think anyone should be trading the USD/JPY pair at the moment. The price movements are just too small to make any real money from.
To demonstrate this point, just look at the weekly chart of the average true range (as indicated by the ATR indicator) of the USD/JPY pair since 2009.
You can see that the average weekly range was around 430 points just prior to 2009, and since then it has fallen lower and lower, and now stands at a pitiful 117 points. Remember this is not 117 points a day, this is 117 points a week!
Furthermore on a daily basis, the story is equally as bleak. The average daily trading range has often been in the 50-60 points region, and sometimes more, but it has dropped off sharply to what must be close to an all-time low of just 31 points. Day trading is hard at the best of times, but trying to squeeze out a decent profit when the USD/JPY pair only moves within a 31 point range every day is near on impossible.
So as I say, I really don't believe it is worth trading the USD/JPY pair at the moment. Unless the daily ATR indicator returns to 50 or 60 points, it is probably best to concentrate on the other major currency pairs instead, such as the GBP/USD and EUR/USD pairs for example.