The price of one currency pair can pass 30 pips in 4 hours, while the quotes of other pairs will fluctuate in the range of 10 pips all this time. In theory, you could earn much more on the first pair. Or, just as quickly, you would face a loss on the price movement, which in 4 hours with a full standard lot for the EUR/USD pair with a pip value of 10 USD would have amounted to 300 USD.
The volatility of a currency pair characterizes the amplitude of the price movements for a particular period and the frequency of movement in a certain range. In this review, you will find out which Forex currency pairs are highly volatile and which pairs have low volatility. You will also learn how this indicator could be used in trading and risk management.
The article covers the following subjects:
What is volatility in Forex?
Volatility is a parameter that reflects the nature of price changes over a particular time interval. The more the price deviates from its average value, and the faster it moves from the average value to the maximum or minimum, the higher the volatility.
On a relatively equal time interval, the amplitude of movement at the red price line is greater – this asset is more volatile. You can make more profits from it. However, there are also risks associated with high volatility – triggering stop losses and slippages.
In one corridor, the red line has a higher frequency – it touches and goes beyond the corridor more often. This asset is more volatile.
In a candlestick chart, volatility can be defined by the candles’ size and the change in price as a percentage. If, in comparison with previous candles, a candlestick with a large body and long shadows appears in the chart, volatility increases.
This term, its causes, and definition tools are discussed in more detail in the article What is volatility?
The most volatile Forex currency pairs
A trader needs to understand the level of current volatility to form a trading system: set target profits, set pending orders, stop loss and take profit levels. If the stop loss is short and the volatility is high, the position will be closed by the stop loss. Setting a long stop is also not always an option, as the risk is much higher in this case.
How to measure volatility:
Visually. For example, 20 candles in a row had a relatively small body, and then two large candlesticks appeared with a gap from the average level. Consequently, volatility is rising.
Example: the price moved smoothly, forming two waves. Then the volatility increased sharply: there were two large candlesticks down with long shadows and one candle up, and then the price action returned to its previous state. If a trader misses the moment of a sharp increase in volatility, the long position is closed by a stop loss set just below the local minimum.
Using indicators. Channel indicators: the channel is expanding – the amplitude of the price movement is growing. Standard deviation and ATR are two more basic tools.
Example. The chart uses the Bollinger Bands and Standard Deviation indicators. At the first candlestick with an abnormally large body, the channel expands, its borders are broken, and the standard deviation grows. All signals point to a sharp increase in historical volatility. A wise Forex trader closes a long position in advance without waiting for the stop loss to trigger at the second candlestick.
Volatility should be considered in tandem with liquidity. According to the calculator, the most volatile Forex pairs are exotic ones. However, it is sometimes difficult to trade volatile forex pairs due to low liquidity, so they are not suitable for beginners. On the other hand, the most liquid pair is EUR/USD, which has high historical volatility and is very popular among traders. Therefore, in the following blocks, pairs will be considered in terms of liquidity.
Major currency pairs
The major pairs are the most liquid and most frequently traded. These include the currencies of advanced economies: USD, EUR, GBP, CHF, CAD, AUD, and JPY. Accordingly, the main currency pairs are pairs with USD.
According to the calculator, the most volatile currency pairs in the period of 20 weeks are:
AUD/USD. Australia is a country that hardly ever participates in geopolitical conflicts. The AUD exchange rate is highly dependent on exports, which often suffer from natural disasters. This explains its periodic deep drawdowns against the US dollar. The best time to trade Forex is the London and American sessions. You can read more about the peculiarities of trading this pair in the article How to invest in AUD/USD: Best Forex strategies.
USD/JPY. This pair is said to be poorly predicted by technical analysis due to the tight control by the Bank of Japan. The main types of trading strategies with USD/JPY are intraday level breakouts at the beginning of the Asian session. Also, this pair is often used in carry trading due to the peculiarities of interest rates. The best time to trade is the Asian trading session.
GBP/USD. The third among the most volatile currency pairs, which accounts for about 12% of all Forex trading volumes. High volatility is associated with the Fed’s monetary policy, which seeks to contain rising inflation, and with the peculiarities of the monetary policy of the Bank of England, as well as the nuances of Brexit. The UK is known for its financial centers, where most Forex traders trade in the national currency. Large trading volumes are also the reason for the very volatile price. The best time to trade is the European trading session.
Periodically, the pairs in this list change places. For example, about 5 years ago, USD/JPY was significantly inferior to EUR/USD, which was the leader of this ranking. At the time of writing, EUR/USD is only in 5th place among the most volatile currency pairs.
Cross rates are Forex pairs that do not include USD. The most volatile are the currency pairs of emerging and developed markets paired with exotics. Due to the fact that exotic pairs are not very suitable for beginners, the emphasis in this block is on the cross-rates of the major volatile currencies.
The most volatile cross rates are:
AUD/JPY. The Australian dollar is a volatile currency due to the dependence of the economy on climate factors. This is a commodity currency, and its exchange rate is highly dependent on exports. Japan is Australia’s second-largest trading partner after China. The AUDJPY pair is very sensitive to any changes in the economy and trade balance of both countries.
NZD/JPY. Here the reason is similar. The New Zealand dollar has a strong direct correlation with the Australian – these countries are close by and have close trade relations.
GBP/NZD. Its historical volatility is driven primarily by New Zealand’s economic factors.
Trading cross-rates is more difficult compared to major currency pairs. Traders must track not only news on cross-currencies but also on USD, which sets the price movement for other currencies. For example, negative statistics on inflation came out in the USA – investors switched from the dollar to the British pound. As a result, the pound rose in price against other currencies, although there were no reasons for this in the UK itself.
Exotic currency pairs
Exotic currency pairs are a combination of emerging market currency pairs and advanced economy currencies. Exotics are practically not represented in the international currency markets; the economies of countries are most often closed and managed manually. Forecasting minor currency pairs is complicated by the lack of fundamental information in open sources, even if these are emerging markets currencies.
Most volatile exotic currency pairs:
USD/RUB. The leader in terms of currency instability in recent years is the Russian ruble. The main reason is geopolitics and sanctions that hit the Russian budget revenues. However, the Central Bank tried to keep the situation under control by running the printing press and managing the exchange rate manually. This explains the return of the exchange rate to the levels of 2020-2021.
USD/BRL. Periodically arising political tension and unpredictability of monetary policy are the reasons for the pair’s constant jumps in both directions.
- USD/SEK. Historically, the Swedish krona, unlike the Swiss franc, has been an unpopular currency. It is not a freely convertible currency or a safe-haven asset.
Other exotic currency pairs with high historical volatility are the ones that include the Mexican peso and the Israeli shekel.
What factors affect the volatility in currency trading?
Volatility is a variable value. This applies to both short-term and long-term periods. If you understand the reasons why any currency pair starts a sharp movement, you can make money on it.
Factors affecting currency pairs’ volatility include:
Economic factors, reports releases. For example, a change in the interest rate, jobs report, inflation, and unexpected statements by representatives of financial institutions. These factors can affect the trends of price changes in the short term.
Example: the US dollar, which was depreciating against the euro, unexpectedly recovered on March 15, 2023. There were no clear reasons for this. Amid negative reports on the US producer price index and the Empire Manufacturing USD index, on the contrary, it should have become cheaper. But Credit Suisse appeared on the scene, whose shares fell more than 25% on March 15 amid a potential bankruptcy. EUR also dropped.
One of the frequently used tools for trading on short-term fundamental volatility is the Nonfarm Payrolls report. You can find out how to make money on it in the article What is the Non-Farm Payrolls Report in Forex.
Geopolitics. This especially affects the currencies of developing countries. The geopolitical crisis that began in early 2022 led to a temporary drop in the Russian ruble against the dollar by more than 50%. It was possible to stabilize the situation in manual mode, including with the help of additional liquidity injected into the system.
Force majeure, natural disasters. The bushfires in Australia in August 2019 hit exports hard. The release of statistics for the year, economic problems, and the beginning of the pandemic led to the fact that in March 2020, the AUD/USD pair reached a minimum over the past 17 years.
Another important factor is liquidity. Liquidity is determined by the volume of trading operations. The more orders to buy and sell, the lower the historical volatility. The placed orders immediately find matching orders. Exotic pairs have low liquidity. You can buy an exotic currency quickly, but it will be difficult to sell it since there are few buyers. This statement is also true for calm markets. However, if there are many sellers and buyers, but suddenly there is important news, sellers immediately turn into buyers (or vice versa), and volatility increases.
What are the least volatile currency pairs?
Low volatility in Forex is determined by the stability of the economies of countries and resistance to various kinds of shocks. Such currencies can be used as safe-haven assets. Another option is that one of the currencies is steadily depreciating relative to the second.
Examples of the least volatile currency pairs:
USD/INR. The Indian economy has long been in a deep crisis, which was exacerbated by the pandemic and the subsequent rise in oil prices (India is one of the largest oil importers). In early 2023, India overtook China in terms of population, but the country’s standard of living remains low. Investors are leaving the country due to the lack of prospects. This pair has low historical volatility; there is just a stable uptrend, which means that the rupee has been depreciating for several years in a row.
EUR/CHF. The Swiss franc is still considered a model of stability, despite the problems of the banking system. This pair has less historical volatility than USD/CHF due to the geographical proximity and close economic ties between the EU and Switzerland.
EUR/GBP. Despite the UK’s exit from the EU, the countries retain close economic ties. Low volatility benefits both economies.
According to the calculator, USD/HKG is one of the least volatile Forex currency pairs among the exotics ones and has almost no volatility. This is because the country’s government firmly holds a stable ratio of the Hong Kong dollar to the US dollar. The narrow currency corridor is kept at the expense of gold and foreign exchange reserves and interventions. This pair is not suitable for trading.
What are the most liquid Forex currency pairs?
Liquidity is the ability of an asset to be quickly bought or sold with a minimum price gap (spread). If many participants are in the market with buy and sell orders, the asset is liquid. If there is no one to sell the purchased asset and you need to greatly reduce the price in order to get rid of it, then the asset is considered illiquid. Exotic currency pairs are instruments with low liquidity, while volatile major currency pairs are highly liquid. However, the fundamental factors could disturb the balance of supply and demand.
The most liquid currency pairs are:
- EUR/USD. This pair accounts for 24%-28% of the trading volume.
- USD/JPY. The trading volumes of this pair are about 13%-17% of the total trading volumes.
- GBP/USD. This pair accounts for 9%-11% of the volume of foreign exchange trading.
In theory, high volatility currency pairs, exotic pairs with high volatility, can yield more profits, but they have wide spreads due to low liquidity. Pairs with high liquidity are more suitable for high-frequency and intraday trading, but it is better to pause during news releases and other fundamental events.
How to trade currency pair volatility
How to build trading systems considering historical volatility? Tips for beginner traders on how to trade volatile currency pairs:
Use not only a stop loss but also a trailing stop. A trailing follows the price in the direction of the forecast, and when the price reverses, the position will be closed. This way, you will make the most profit from volatility and not risk when the trend changes. However, it is important to remember that a trailing stop is set in your trading platform, and if the connection to the server fails, the order will not work out, and the trade will remain open. But there is a way out. For example, you can rent a VPS.
Frequently used strategies include trading inside the channel, on the channel breakout, and searching for the beginning of a trend on the growth of volatility after trading flat.
Consider the possibility of rising volatility when calculating the trade volume and stop loss length.
An increase in the amplitude of the price movement can trigger stops. And if you increase the length of the stop, the risk of losing money will increase. Besides, the larger the volume of the transaction, the higher the pip value and the faster you can get a stop-out.
Using the volatility calculator and ATR, you can evaluate the strength of the trend and the prospects for a reversal. For example, you know that the daily price range is 80 pips. Let’s assume that since the beginning of the day, the price has gone up half of the range. It is logical to assume that the price will most likely stop at its border. And if the end of the trading day is still far away, then a reversal is possible.
If you want to make money on the exotic currencies volatility, enter a trade only at the moments of a very strong movement in a particular direction. Be aware of large spreads, swaps, and slippage on such assets.
When trading on the news, use pending orders. In the first few minutes, traders make a decision, so the price can fluctuate in both directions. The range of fluctuations can be estimated by analogy for previous periods. Place pending orders in both directions outside the volatility range, one of them will definitely work.
And the main advice: if there is an increase in volatility, but you see no reason for this, then exit trades or open locked positions. The higher the volatility, the less predictable the Forex market is. This is one of the reasons why beginners are advised to exit trades 5-10 minutes before the news release and skip the first 10-15 minutes of trading.
Volatility is a parameter that evaluates the speed, frequency, and amplitude of price changes. For an active trader, trading on volatile instruments is a good opportunity to quickly make money on the reversal of a position (from long to short and vice versa). For a position trader, it is the risk of making a loss on a triggered stop loss.
Factors that increase Forex volatility: publication of economic reports (inflation, employment, etc.), macroeconomic news (changes in interest rates, information on monetary policy from the Central Bank, etc.), geopolitical events, natural factors, and force majeure.
The most volatile Forex pairs among the major currencies are AUD/USD, USD/JPY, and GBP/USD; among the exotics currencies, the most volatile are USD/RUB, USD/BRL, and USD/SEK.
The most liquid currency pairs are EUR/USD, USD/JPY, and GBP/USD.
Any trading strategy based on volatility suggests high risks involved. Even in liquid markets, there are slippages and spread widening during sharp price spikes. Conservative strategies are trend trading with low volatility assets.
Do not chase profit in volatile markets. Strictly adhere to the rules of risk management, and no force majeure will be able to break your trading system.
Most volatile currency pairs FAQs
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