What are the most volatile forex currency pairs to trade?
October 14, 2023
Currency pairs may experience severe fluctuation, which can pass 30 pips in a short time, while more stable pairs may experience ups and downs in the range of 10 pips during this very same time. The EUR/USD pair would face a loss on a price fluctuation in a short period, or it may gain value to transfer its 10 USD worth to 300 USD.
The volatility of a currency pair shows all the characteristics and the fluctuation rate of that pair within a specific period. Let’s get introduced to the highly volatile pairs in the forex market and know the pairs with low volatility. But how can a trader use these data while trading and risk management?
Table of Contents
What does volatility mean in the Forex market?
Volatility is an index to indicate price fluctuation during a certain time. The price deviation from its mean value and the paste of this deviation would be shown by the maximum or minimum rate; the greater difference would show higher volatility.
If, on an extinct time interval, the price movement of an asset is greater than the average, this asset is volatile and may make more profits than others. But it is good to remember that high volatility may equal great loss as well.
Candles’ size in a candlestick chart could show volatility rate and price change in percentage. A large candlestick with a long shadow will show increasing volatility.
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What are the most volatile Forex currency pairs?
To be a profitable trader, it is good advice to know everything about current volatility within the trading process. First, determine a specific target for your profits, then set orders wisely, and after that, start to take profits. The predicted stop loss may be short besides high volatility; however, a long stop is not a good option because of its higher risk. But how to recognize and measure volatility?
- If some candles on a line have small bodies, and there are large candlesticks with a great difference from the mean level, it may cause high volatility.
- If the price movement is gradual, the resulting form would be wavy.
- If the volatility increases sharply, two big candlesticks with great shadows will appear. In this case, the price will return to its previous state.
- If a trader cannot predict the sharp increase moment in volatility, they would find the long position just below the minimum.
However, to measure the volatility, you can:
- Use a calculator,
- Compare time ranges,
- Using indicators.
A proper calculation may show the exotic pairs are the most volatile Forex pairs. However, sometimes, the lower liquidity of volatile forex pairs makes the trading process more difficult, so they are not advisable for beginner traders. But keep in mind that the most liquid pair is EUR/USD, which has had high volatility and is very welcome by all traders.
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Let’s get to know some major currency pairs
A major pair is a pair that is more liquid and is traded more frequently. These pairs belong to currencies of advanced economies like USD, EUR, GBP, CHF, CAD, AUD, and JPY.
Precise calculators show that the most volatile currency pairs in a 20-week-interval are:
- AUD/USD. The Australian exchange rate is dependent on exports, which suffer from natural disasters most of the time. Its periodic drawdowns against the US dollar are the main cause.
- USD/JPY. Japanese banks are controlling this pair severely, so it is difficult to predict its position by technical analysis.
- GBP/USD. This pair consists of 12% of all trading happening in the Forex market, which is the third volatile currency pair.
The mentioned pairs change places periodically. USD/JPY was lower than the EUR/USD some years ago.
What are cross pairs?
If a pair does not include USD, then it is a cress pair. The most volatile cross pairs are among exotic pairs, which are not suitable for beginners.
The most volatile cross rates are:
- AUD/JPY. Dependance on climate change makes the Australian dollar a volatile currency. After China, Japan is the second partner for Australia. Sensitivity to any economic change and trade balance of each of the countries makes it volatile.
- NZD/JPY. Australian and New Zealander dollars have a direct correlation with each other because they have close relations.
- GBP/NZD. It has had volatile characteristics primarily depending on New Zealand’s economic factors.
It is more difficult to trade cross pairs in comparison to major currency pairs. It is wise to pursue cross pairs and the related currencies beside the USD.
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What are exotic currency pairs?
If emerging market currency pairs and advanced economy currencies get combined, then exotic currency pairs are created. Exotics are closed ones, and they are managed manually.
Some of the most volatile exotic currency pairs are:
- USD/RUB. The Russian ruble is one of the leading currencies in this market. Geopolitics and sanctions are among the main reasons to keep this currency on hit. However, the Central Bank has been trying to have control by managing the exchange rate manually.
- USD/BRL. Political tensions and unpredictable financial policy cause the pair’s constant movements in both directions.
- USD/SEK. The Swedish krona has been an unpopular currency, unlike the Swiss franc, because it has not been a safe asset and freely convertible.
Exotic currency pairs, including the Mexican peso, have had high volatility and include the Israeli shekel.
What factors affect the volatility in currency trading?
Volatility is a variable value for both short-term and long-term time intervals. You could make money if you distinguish the details of any currency pair and its fluctuations or sharp movements.
The affecting factors on currency pairs’ volatility are:
- Economic factors like any shift in rates of interest, jobs, inflation, and unexpected movements by any financial institution. All of the mentioned factors can cause short-term changes in prices.
- Geopolitics has always affected the currencies in developing countries. The movements in Russia caused a crisis in early 2022which led to a drop of the Russian ruble against the dollar by more than 50%. Some manual efforts could stabilize the situation, which was possible adding liquidity into the system.
- Unpredicted natural disasters like what happens in Australia could cause direct changes in statistics and some economic problems.
- The last significant factor is liquidity, which is determined by the trading process and the amount. If the trading orders are higher, the volatility would get lower. You can buy an exotic currency quickly, but selling an exotic currency is more difficult because they are not welcome by many traders. Sometimes, some unexpected news may change the direction of the market, and all the traders may get interested in buying some of these pairs; in this case, all sellers become buyers or all decide to become sellers, which causes an increase in the volatility rate.
What are the least volatile currency pairs?
Economically stable countries that can bear the shocks determine the low volatile pairs in the Forex market. Traders can consider such currencies as safe assets.
Some of the least volatile currency pairs are:
- USD/INR. The Indian economy is handling the most populated area’s economy and finances. Its investors do not aim to invest within the country because of the poor living standards. This pair has had low volatility; however, the stability is uptrend, and the rupee has depreciated all during these recent years.
- EUR/CHF. The Swiss franc has always been a stable currency. Its volatility is less than USD/CHF, which is the result of the geographical facts and close economic relations with the EU and Switzerland.
- EUR/GBP after the UK’s exit from the EU. Low volatility seems to be good for both of the economies.
- USD/HKG is the least volatile Forex currency pair with few volatilities, considering its exotic place.
What are the most liquid Forex currency pairs?
If you can buy or sell a pair of currencies with the least price difference, then that pair can be considered a liquid currency pair.
If there are a lot of participants to buy and sell a specific asset, the asset is liquid.
If there is no one to trade it and you have to reduce the price to convince some potential buyers, then the asset is considered illiquid.
The most liquid currency pairs are:
- EUR/USD with about 24%-28% of trading volume.
- USD/JPY with about 13%-17% of trading volumes.
- GBP/USD with about 9%-11% of trading volume for foreign exchange trading.
Keep in mind that currency pairs and exotic pairs with high volatility can offer more profits with wide spreads because of low liquidity.
How to trade currency pair volatility
If you are a trader eager to launch a trading process considering the volatility factor, there are some hints and tips:
- Trailing stop is even more important than stop loss. While trailing, you follow the price range through the forecast. You can gain the highest profit from volatility with no risk, even if the trend shifts. However, since the trailing stop is set in your trading platform, the order will not work out if the connection to the server collapses so the trade will remain open. But if you rent a VPS, you may solve the problem.
- Proper strategies are trading inside or on the channel and starting the trend on the volatility peak after trading flat.
- You can evaluate the trend power by using the volatility calculator and ATR. For example, consider that the price has raised half of the range from the early morning, so you can predict that the price will most likely quit and stop there, and reaching the reversal point is possible.
- Just accept the trading risk at very strong movements because issues like large spreads, swaps, and slippage may happen for such assets.
Conclusion points in brief
Volatility measures the speed, frequency, and amplitude of price movements. Trading on volatile instruments is a good chance to make quick money on the reversal of a position for an aware trader. But facing a loss on a stop loss is greatly possible for an unaware trader.
Factors that increase Forex volatility are:
- Economic reports on media like inflation and employment, macroeconomic news like changes in rates of interest, monetary policy and financial issues, geopolitical events, and natural events.
- AUD/USD, USD/JPY, and GBP/USD are the most volatile Forex pairs between the major currencies, and USD/RUB, USD/BRL, and USD/SEK are the most volatile between exotics currencies.
- EUR/USD, USD/JPY, and GBP/USD are the most liquid currency pairs.
It is wise to consider that a trading process based on volatility may contain high risks even in liquid markets. If a trader is conservative enough may prefer trading with low-volatility assets.