Many traders adapt their tactics to gain on the most volatile currency pairs because FX markets are sensitive to a variety of factors that affect their volatility.
Currency volatility, which is frequently calculated by measuring the standard deviation or variance of currency price movements, informs traders about how much a currency may change relative to its average over a certain time period. Traders can also assess volatility by examining the average actual range of a currency pair or the range expressed as a percentage of spot.
The greater the degree of risk, the greater the level of currency volatility, and vice versa. The terms volatility and risk are frequently used interchangeably.
On average, different currency pairs have varied amounts of volatility.
Some traders prefer trading volatile currency pairs because of the higher potential gains. When trading extremely volatile currency pairings, traders should consider limiting their position sizes because the increased potential gain comes with a higher risk.
WHICH CURRENCY PAIRS ARE THE MOST VOLATILE?
The following are the most volatile major currency pairs:
AUD/JPY (Australian Dollar/Japanese Yen)
NZD/JPY (New Zealand Dollar/Japanese Yen)
AUD/USD (Australian Dollar/US Dollar)
CAD/JPY (Canadian Dollar/Japanese Yen)
AUD/GBP (Australian Dollar/Pound Sterling)
As a result, other key currency pairs such as EUR/USD, USD/JPY, GBP/USD, and USD/CHF are more liquid and less volatile. Emerging market currency pairs, such as the USD/ZAR, USD/TRY, and USD/MXN, have some of the highest volatility levels.
PAIRS OF THE MOST VOLATILE CURRENCY
Majors – AUD/JPY, NZD/JPY, AUD/USD, CAD/JPY, GBP/AUD
Emerging Markets – USD/ZAR, USD/TRY, USD/MXN
WHERE DO THE LESS VOLATILE CURRENCY PAIRS FIT IN?
The largest currency pairs, which are also the most liquid, have the least volatile currency pairs. Furthermore, their economies are larger and more developed. This generates increased trading volume and, as a result, improves price stability. Given the enormous levels of liquidity that EUR/USD, USD/CHF, and EUR/GBP trade with, it’s no surprise that they’re among the most volatile currency pairs.
The average true range (ATR) for USD/CHF is between 45 and 65 pips, which is a modest average true range when compared to other pairings. The average true range of a currency is one of several measures to assess a currency pair’s volatility. Another common technical indicator for measuring volatility is Bollinger Band width.
The volatility of two currencies can be affected by their correlation. The lower the volatility, the more positively two currencies are connected with one another. Continuing our USD/CHF comparison, both the US Dollar and the Swiss Franc are considered safe-haven currencies.
When the market suffers episodes of risk aversion, the US Dollar and Swiss Franc tend to strengthen against their sentiment-linked counterparts, but the two currencies may not diverge much from each other. This contributes to the USD/CHF volatility estimates being quite low.
VOLATILITY IN CURRENCY PAIRS AND HOW TO TRADE IT
When trading, forex traders should consider current volatility levels as well as potential changes in volatility. Market participants should also think about how volatile a currency pair is when altering their position sizes. When trading a volatile currency pair, a smaller position size may be required.
Volatility awareness can also aid traders in determining appropriate stop loss and take profit limit orders. It’s also crucial to comprehend the essential criteria that distinguish the most volatile currencies from those with low volatility readings.
Traders should also understand how to calculate volatility and be mindful of events that could cause significant fluctuations in volatility.
The difference between trading high-volatility currency pairings and low-volatility currency pairs
- Currency pairs with high volatility typically move more pips over time than those with low volatility. When trading currency pairs with significant volatility, this increases the risk.
- High-volatility currencies are more prone to slippage than low-volatility currencies.
- Due to the larger changes made by high-volatility currency pairings, you should decide the proper position size to take while trading them.
Volatility can be measured in a variety of ways.
Traders must have an idea of how volatile a currency will be in order to establish the appropriate position size. Volatility can be measured using a variety of indicators, including:
- True range average (ATR).
- Channels of Donchian origin.
- Moving averages are a type of average that is used to (by comparing the moving average to the current price).
Traders can also look at implied volatility readings, which show the level of predicted volatility based on options.
Traders should be aware of the following key points about volatility:
- Large-scale news events, such as Brexit or trade conflicts, can have a significant impact on currency volatility. Volatility can also be influenced by data releases. Traders can use an economic calendar to stay ahead of data releases.
- Many technical components of trading, such as support and resistance levels, trendlines, and price patterns, still apply to volatile currency pairs. Traders can profit from the volatility by combining technical analysis with stringent risk management methods.
- Keeping up with the latest currency pair news, research, and rates can help you anticipate potential volatility fluctuations. To assist you in navigating the market, we provide extensive trading projections.