FX markets are prone to a range of factors affecting their volatility, and many traders are trying to adjust their strategies to capitalize on the most volatile currency pairs.
Currency volatility, which is often measured by calculating the standard deviation or variance of currency price movements, gives traders an idea of how much a currency can move relative to its average over a given period. Traders can also measure volatility by looking at a currency pair’s average true range or by looking at size as a percentage of spot.
The higher the level of currency volatility, the higher the degree of risk, and vice versa. Volatility and risk are usually used interchangeably.Different currency pairs have different levels of volatility averaged.
Some traders enjoy the higher potential rewards associated with trading volatile currency pairs. Aalthough, this increased potential reward offer a bigger risk, so traders should consider reduceing they position sizes when trading highly volatile currency pairs.
What are the most volatile currency pairs?
The most volatile major Currency pairs are:
Other major currency pairs, such as EUR / USD, USD / JPY, GBP / USD and USD / CHF, are generally more liquid and less volatile as a result. That said, emerging market currency pairs, such as USD / ZAR, USD / TRY and USD / MXN, may clock some of the highest volatility readings.
MOST VOLUME Currency Pairs
majors – AUD / JPY, NZD / JPY, AUD / USD, CAD / JPY, GBP / AUD
Emerging markets – USD / ZAR, USD / TRY, USD / MXN
Apart from relatively low liquidity, e.g.merging market currencyies tend to be tall volatile especially due to inherent risk underlying emerging market economies. The graph below gives an example of how volatile emerging market currenciesies Can bewhat shows USD / ZAR (US dollar/South African rand) almost exploded 25% higher in just over a month’s time. There are several other examples of emerging market currency pairs drastically so swinging through history.
What about the least volatile currency pairs?
The least volatile currency pairs tend to be the most important currency pairs which are also the most liquid. These economies also tend to be larger and more developed. It attracts more trading volume and facilitate larger price stability on his turn. Given that, given the EUR / USD, USD / CHF and EUR / GBP trades with high volumes of liquidity, it does not come as a surprise that they are volatile currency pairs under the lease.
Illustrated below, tthe average true range (ATR) on USD / CHF switch between 45-pips and 65-pipsa low average true range compared to other pairs. The average true range of A currency is one of the many ways to measure the volatility of a currency pair. Bollinger bandwidth is another popular technical indicator used to measure volatility.
Correlation between two currencies can also an impact on their volatility. The more positively two currencies correlate with each other can lead to less volatility. Continuing with our USD / CHF example, we note that the US dollar and Swiss franc are both considered safe haven currencies.
The US dollar and Swiss franc tend to strengthen against their sentiment-linked counterparts when the market experiences episodes of risk aversion, but the two currencies may not differ much from each other. This contributes to relatively low volatility readings for USD / CHF.
How to trade currency pair volatility
Forex Traders Must Take take into account current readings of volatility and potential changes in volatility when trading. Market participants should also consider adapting their position sizes with respect to how volatile a currency pair is. Trading a volatile currency pair can justify a reduced position size.
Awareness of volatility can also help traders determine appropriate levels for stop loss and take profit limit orders. Furthermore, it is important to understand the key features that separatemost quickly currencies of currencies with low volatility readings. Traders must also know how to measure volatility and have an awareness of events that can make big changes in volatility.
The difference between trading currency pairs with high volatility versus low volatility
- Currencies with high volatility will normally move more pips over a certain period as currencies with low volatility. This leads to increased risk when trading currency pairs with high volatility.
- Currencies with high volatility are more likely to slide as low-volatility currency pairs.
- Due to high-volatility currency pairs that make larger moves, you need to determine the correct position size to take when they trade.
There are several ways to measure volatility
To determine the correct position size, traders need to have an expectation of how volatile a currency can be. A variety of indicators can be used to measure volatility such as:
Traders can also look at implied volatility readings, reflecting the level of expected volatility derived from options.
Key things traders need to know about volatility:
- Big news events like Brexit or trade wars can have a major impact on a currency’s volatility. Data releases can also affect volatility. Traders can stay ahead of data releases by a economic calendar.
- Volatile currency pairs still obey many technical aspects of trading, such as support and resistance levels, trend lines and price patterns. Traders can take advantage of volatility using technical analysis combined with rigorous risk management principles.
- Stay up to date with the latest forex pair news, analysis and tariffs can help you predict possible changes in volatility. We provide comprehensive trading forecasts to help you navigate the market.
- techlives hosts daily webinars to answer questions and help traders prepare for volatile market conditions.
- Supplement your forex learning and strategy development with the techlives Education Center.