Currency rate volatility, which is frequently determined by calculating the standard deviation or variance of currency price movements, informs traders of how much a currency may fluctuate relative to its average over a specified time period.
Traders may also evaluate volatility by studying the actual average range of a currency pair or the content reported as a percentage of the spot. The greater the degree of risk, the more significant the currency rate volatility, and vice versa.
Sometimes, volatility and risk are used interchangeably. Various currency pairs have varying levels of volatility on average. Due to the more significant profit potential, some traders favor trading pairs of risky currencies. When trading highly volatile currency pairs, traders should consider reducing their position sizes due to the heightened risk and potential reward.
Volatility is frequently used in forex trading; it is essential to comprehend this phrase if you wish to begin trading. Volatility is the frequency with which your currency pair swings and is often determined by calculating the variance or standard deviation of forex price movement.
This information is typically essential to traders and investors because it allows them to predict future investment possibilities and currency movement over time. The most volatile forex pairs see considerable price fluctuations throughout a particular period, whereas the least volatile pairs experience modest price fluctuations. With a solid trading technique, it is possible to generate enormous returns from the most volatile forex pairs.
Typically, volatility is determined by both the base and quote currency. If one of them is triggered by particular events, the currency pair will change significantly. These events may include geopolitics and interest rates, among others. The image below clearly demonstrates the extreme volatility of the EUR/AUD currency pair.
Volatility in finance refers to the frequency and magnitude of price fluctuations. It is claimed that an asset is very volatile if its price swings significantly over a specific time period. In contrast, they assert that there is less volatility if the asset's price does not change over time. The image below depicts the extremely volatile EUR/AUD currency pair.
In general, the forex market is highly volatile, and currency pairs move more than equities, real estate, etc. However, not all forex pairs are similarly volatile.
The volatility of a currency pair is determined by the volatility of its base and quoted currencies. If any of them is susceptible to certain events that occur during trade, the currency pair is likely to change significantly.
As stated previously, volatility is a time-based metric. Therefore, we can discuss daily, weekly, monthly, and annual volatility. A forex pair is deemed volatile if its price fluctuates by more than 0.7% over an extended period of time.
Traders use the true average range (ATR) indicator to determine the historical volatility of an asset, and it is a frequent MT4/MT5 indication. Below is an example of a chart including the ATR indicator for the EUR/AUD currency pair.
When there is ambiguity regarding the risk associated with the change in the value of a security, the market experiences unexpected and frequently severe volatility, this can result in the spread of a security's value over a wider range, and as a result, the price of the asset may fluctuate drastically over a short period of time.
One of the primary causes of market volatility is market sentiment, which is subsequently influenced by the following factors:
Economic news, including data releases, central bank statements, and others
Variations interest rates
Political developments
New product launches by corporations
Recommendations from well-known, trustworthy analysts, and
Trends emerge when and where traders follow one another.
What is the difference between trading currency pairs with high and low volatility?
Generally speaking, currency pairs can be split into three categories:
Major pairs
The major currency pairs include the most actively traded currency pairs on the forex market, such as EUR/USD, GBP/USD, USD/JPY, and USD/CHF. The US Dollar, Swiss Franc, and Japanese Yen are regarded as safe-haven currencies.
Minor pairs
Minor currency pairs exclude the US Dollar and include at least one of the world's other main currencies. Examples are the EUR/GBP, GBP/JPY, and CAD/CHF pairs.
Exotic pairs
Typically, exotics consist of a significant currency exchanged against a lesser-traded or emerging market currency. These pairs, which include USD/TRY, USD/MXN, and EUR/RUB, have some of the highest volatility values.
The volatility of exotic currency pairs is typically greater than that of main currency pairs. The reason for this is liquidity; currencies such as the Euro, British Pound, and Swiss Franc have deep liquidity, but emerging market currencies such as the Turkish Lira, South African Rand, and South Korean Won will have significantly less liquidity available.
Liquidity is the ability to buy or sell a currency without generating a substantial market movement. For instance, an order to purchase 50 million EUR/USD will have little effect on this relatively liquid currency pair, yet it could have a significant impact on an exotic currency pair such as USD/TRY. More minor liquid currency pairs also tend to have a widespread, which raises the trading expenses for forex traders.
What you must know about volatile forex pairs
The forex pairs with the most volatile price movements offer the most potential for profit. However, increasing volatility can enhance a trader's exposure to risk as well as the potential for profit.
In general, volatile currency pairs are affected by the same forces as their less volatile counterparts. These include interest rate differentials, geopolitics, the perceived economic strength of each currency's issuing nation, and the value of these nations' imports and exports.
However, there are a few factors to consider before establishing a position on a volatile currency pair. Because not every trader has the risk tolerance for taking a role in a volatile market, volatile currency pairs typically have lower levels of liquidity than their less volatile equivalents. However, with a well-thought-out trading plan and risk management technique, there is little to worry from volatile currency pairs.
It is difficult to compile a definitive list of the most volatile currency pairs, primarily because volatility can affect different currency pairs at different times. This is due to the previously listed factors that can affect the price of a currency pair to rise or fall. However, several currency pairs have experienced historically high levels of volatility.
Advantages and Disadvantages of Trading the Most Volatile Currency Pairs
High-volatility currency pairs have a good potential of becoming "lottery tickets" - pairs that can pay out huge profits on first trades that cost investors very little money to enter into.
A large number of forex investors seek to outperform the market and are not hesitant to invest in pairs with high volatility. These high-risk pairs see the bidding climb with this infusion of money, raising volatility even more so.
If you can ride the tiger (so to speak) at the proper time with this kind of volatility, you can turn a modest amount of money with a bit of leverage into a life-changing fortune very rapidly.
On the other hand, during periods of extreme ups and downs in volatility, stop losses – even trailing stop losses – are regularly triggered.
The difficulty is that a stop-loss can force you to exit a position at a loss just as the market is about to return to its highest levels ever before, plummeting back to your stop loss once more and repeating the cycle.
High volatility trading is mostly a short-term sort of action.
A lot of longer-term investors (particularly those who are more comfortable with the "buy and hold" ideals of the stock market) typically aren't going to be able to stomach the severe swings that high volatility currency pairs eventually bring to the table.
Consider these possibilities to "get in and get out" and rethink your strategy.
Do You Know Which Currency Pairs Are the Most Volatile?
Finding the most volatile currency pairs in the Forex market is an essential piece of the jigsaw, but finding them isn't going to be difficult.
You'll want to seek "exotic pairs" like the ones we highlighted a minute ago — these are the currency pairs that mix one major currency with another currency from an emerging economy.
You'll want to be on the lookout for the current movement tendencies for currency pairs as well. A currency pair that changes 200 pips within a particular block of time will be a lot more volatile than a currency pair moving 25 pips, 50 pips, or even a hundred pips over that same stretch of time.
Volatility is often likely to be influenced by financial information, political uncertainty or events, the liquidity of one currency in that pair (or both), as well as the total supply and demand for that pair. If you're interested in this part of forex trading, I'd recommend using the news sites like Forex LiveOpens in a new tab. To be aware of all trending economic changes.
At the end of the day, market research and technical analysis can help you find currency pairs that are witnessing a lot more volatility than others.
You're going to have to read some charts, and you're going to have to pay attention to movement on a day-to-day basis. This is essentially the only concrete technique to tell which currency pair is volatile at the moment.
Have a look at pips per day movement data and see what type of volume these currency pairs are trading at.
Are you witnessing a lot of movement?
Are prices bouncing all over the place?
Have things slowed down and flatlined a little bit?
Answer these questions as soon as you are getting ready to pull the trigger on a trade, and you'll know whether or not you are getting into a high volatility pair or one that's a little less risky – as well as has a little less potential to pay out big time.
AUD/JPY
The Australian dollar versus the Japanese yen is the most volatile forex pair on this list as it is susceptible to market swings. Even though the Australian dollar is in high demand, it fluctuates dramatically as it is a commodity currency. Its price is connected to Australia's exports, mainly metals, minerals, and farm products.
In addition, the Japanese yen is considered the safe-haven currency as investors resort to it in times of adversity. This is not the same for the AUD, and because of this, the AUD/JPY pair can suffer huge price volatility depending on global economic events.
USD/MXN
This is another forex pair that moves the most in the market. It is a representation between the US dollar and the Mexican peso. Even though the pair is liquid, it is nevertheless more volatile due to the animosity between the two countries. Another factor is that significant tariffs have been put on Mexican exports, making USD/MXN a more volatile currency pair.
USD/BRL
The USD/BRL puts the US dollar against the Brazilian real. Day traders often prefer trading with this pair as it has rapid price swings and provides a possibility to generate profits. The reason for its extreme volatility is political instability and the high corruption rate in the country. This pair is most likely to remain volatile in the future years.
GBP/AUD
The British pound against the Australian dollar is a volatile cross pair. Since the Australian dollar is a commodities currency and there have been trading conflicts with China, the markets have fallen, making this pair very volatile.
USD/ZAR
The USD/ZAR is the US dollar vs. the South African rand pair. It is one of the forex pairs that move the most as the price of gold affects it. South Africa exports gold as one of its key commodities, and because gold is priced in the US dollar, it is strongly influenced by how the USD rises or weakens.
So this means that if the gold appreciates, so does the USD. This is fantastic for South African exporters as they will generate more US dollars, but it will disadvantage people who wish to purchase USD using ZAR. This is why traders must evaluate the price of gold before trading with this pair.
USD/KRW
The USD/KRW is a pairing of the US dollar versus the South Korean won. In its current form, the South Korean won was founded after the Second World War. Following the split, the South sided with America and the North allied with Russia, and as a result, the economic disparities between capitalism and communism were evident.
NZD/JPY
The currency pair is between the New Zealand Dollar and the Japanese Yen. As with AUD, NZD is also a commodity currency that has its value tightly related to the agricultural exports of New Zealand, which makes this currency highly volatile.
The critical exports in New Zealand are dairy, eggs, beef, timber, honey, and others, and as a result, the tiniest change in these products will substantially alter the value of NZD against JPY.
Not only is JPY a safe haven currency, but it has a history as a low-yielding currency, making it an appealing vehicle to fund carry trades. Investors generally favor such transactions during periods of optimism over global economic performance and stability.
Considering these factors renders the NZD/JPY particularly susceptible to broad-based market mood patterns fluctuations. The Forex pair is consequently highly likely to respond to economic news, both domestic and significant trading partners.
These factors considerably impact expectations for the Reserve Bank of New Zealand and its monetary policy.
Traders who want to trade volatility in the Forex market can do so through two popular means, opening a CFD account with a broker or a spread betting account, albeit spread betting is only limited to EU clients.
Both CFDs and spread bets are financial derivatives that allow traders the ability to either go long to bet when the market rises or too short of speculating should the need decline.
To start trading Forex volatility, traders simply follow these basic steps:
Traders need to select and investigate a volatile Forex pair that they wish to trade, which can be any from the list provided earlier in the article.
Traders must thoroughly investigate the Forex pair of their selection, which will involve both a fundamental and technical analysis.
Traders can then proceed to select a trading technique that they are comfortable with, familiarize themselves with the strategy, backtest it, and ensure that they are satisfied with their exposure to risk.
Traders must then locate a Forex broker that appropriately accommodates their trading demands, establishes a live trading account, and deposit their initial deposit.
Lastly, traders can open a position using the Forex pair that they would like to trade and thereafter monitor their situation and close it according to their trading plan.
Although these steps may sound straightforward, each one requires a variety of actions and processes which need to be followed. Beginner traders cannot start trading without guaranteeing that they have the requisite Forex knowledge and the general know-how of trading.
Each step includes a procedure, and new traders will need to undertake the appropriate study on each to guarantee that they are prepared for trading in a live environment where their funds are at risk.
Final Thoughts
In essence, the most volatile forex pairs witness the most considerable price swings and are driven by a range of factors, including global economic conditions, political uncertainty, and overall supply and demand. You may locate these pairs by analyzing pip fluctuations as well as overall volume, and you can make money off of them by trading short-term with an understanding of the dangers involved.
Remember, high volatility trading isn't for everyone – it can be highly hazardous, and it often goes against the buy-and-hold philosophy of many longer-term investors. But if you are willing to bear the risk and you know what you are doing, then these volatile currency pairs can undoubtedly help you make some substantial money.
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