Does perception mislead reality in trading?

I have been asked to respond to a question in relation to an upcoming webinar I am providing to FX traders at a proprietary trading house. The question is as follows:

Should EURUSD traders consider switching to alternative currencies such as the AUDUSD, or even different products, in light of the casino that has been the EURUSD market over the past 6 - 8 months?

When I was asked to respond to this question I thought yes this seems reasonable, EURUSD has been a very difficult trading currency for many in the past year, with the rumour-fest that was the 2nd half of 2011 messing with many people's trading accounts.Whereas there is a common perception that the AUDUSD had been a good trending currency in recent months with manageable levels of volatility.

I decided to put this question out to a number of trusted friends and contacts at various investment banks and hedge funds to illicit some of their responses. The general tone of the response has been that switching markets away from what one is use to is fraught with danger, taking one away from their core capabilities, strengths and areas of familiarity. However, it was also generally pointed out that the AUDUSD has been a steadier trending and trading currency that the EURUSD over the past year. 

However, one respondent disagreed totally, his assertion was that the AUDUSD has not been less volatile than the EURUSD nor a better trending currency, it is just that AUDUSD traders are more familiar than EURUSD traders with the excessive volatility, and that the relative conditions were less unusual for AUDUSD traders compared to EURUSD traders. - This was an interesting point which particularly resonated with me as last year my EURUSD trading left something to be desired, whereas my AUDUSD trading last year was extremely successful. Had this been the case, that I did not need to adjust my trading on the AUDUSD as its behaviour was not so different to what I had been use to over the years? Whereas my EURUSD trading was a different story, cutting me out more often than would normally be the case, and providing me with misleading signals relative to its usual behaviour.

I decided to look at this phenomenon a little further, I have produced some charts, based off the size of daily price ranges relative to price (this allows for a comparison of two different currencies performance, and compensates for the changing price level over time). - I was adamant, that the EURUSD had been far more volatile than the AUDUSD in H2 last year, and I sensed that many people shared that opinion. The data however tell a different story. 

The first charts below show data from the year 2000 to the present:

• EURUSD to the left and AUDUSD to the right.
• The top charts show the 20 day average range as a percentage of price. 
• The lower charts show the 10 day average of the 10 day standard deviation of range as a percentage of price.
• The area marked in the Red border is the data for the second half of 2011.

Is this a case of lies, damned lies, and statistics? - The next charts shows the AUDUSD daily and the EURUSD daily over the past 9 months. 

Looking at this , not only does the AUDUSD look more volatile on a daily basis, its also looked that contrary to a few opinions the EURUSD had been more trending than the AUDUSD. 

Finally the last charts show the period from the beginning of June last year through to the end of December, highlighting the daily range relative to price for each currency. 

I think it is crystal clear from these last charts, that despite the rumour fest which coincided with the European Sovereign Debt crisis of last year (still on-going), the EURUSD was not more volatile than the apparently safer (in terms of volatility) AUDUSD, despite what seems to be a quite common perception out there amongst many FX traders, that teh opposite is true. (Unless of course I am canvassing opinion from a very small group of unrepresentative traders.)

Thus answer to the original question. - If one was to move to the AUDUSD to escape the volatility of the EURUSD they would actually be increasing their exposure to volatility, and not escaping it.

In fact to further quote one of my good trading friends, who had an excellent year on the EURUSD last year bucking the opinions of many others, 'The key is to see it for what it is and to look at the opportunities it provides, rather than see danger at every turn'.

With regard to the question - Does perception mislead reality in trading? - I think this is a bias which affects many traders, and indeed can affect whole groups.