The Most Volatile Currency Pairs and How to Trade Them

The Most Volatile Currency Pairs and How to Trade Them



FX markets are susceptible to a range of factors which affect their volatility, and many traders look to tailor their strategies to capitalize on the most volatile currency pairs.To get more news about AtlasFX, you can visit wikifx.com official website.

　　Currency volatility, often measured by calculating the standard deviation or variance of currency price movements, gives traders an idea of how much a currency might move relative to its average over a given time period. Traders can also gauge volatility by looking at a currency pairs average true range or by looking at range as percent of spot.

　　The higher the level of currency volatility, the higher the degree of risk, and vice versa. Volatility and risk are usually used as interchangeable terms.Different currency pairs have different levels of volatility on average.

　　Some traders enjoy the higher potential rewards that come with trading volatile currency pairs. Although, this increased potential reward does present a greater risk, so traders should consider reducing their position sizes when trading highly volatile currency pairs.　　Other major currency pairs, like 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 andUSD/MXN, can clock some of the highest volatility readings.

　　Aside from relatively low liquidity, emerging market currencies tend to be highly volatile in particular due to inherent risk underpinning emerging market economies. The chart below gives an example of how volatile emerging market currencies can be, which shows USD/ZAR (US Dollar/South Africa Rand) exploding nearly25% higher in just over a months time. There are several other examples of emerging market currency pairsswinging drastically like this throughout history.

The least volatile currency pairs tend to be the major currency pairs which are also the most liquid. Also, these economies tend to be larger and more developed. This attracts more trading volume and facilitates greaterprice stability in turn. To that end, considering EUR/USD, USD/CHF and EUR/GBP trade with high volumes of liquidity, it comes as little surprise they are among the lease volatile currency pairs.

　　Illustrated below, the average true range (ATR) on USD/CHF ranges between 45-pips and 65-pips, a 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 Band width is another popular technical indicator used to measure volatility.Correlation between two currencies can also have an impact on their volatility. The more positively two currencies are correlated to one another might lead to less volatility. Continuing with our USD/CHF example, we note that the US Dollar and Swiss Franc are both viewed as safe-haven currencies.

　　The US Dollar and Swiss Franc tend to strengthen against their sentiment-linked peers when the market experiences episodes of risk aversion, but the two currencies may not deviate much from each other. This contributes to relatively low volatility readings for USD/CHF.Forex traders should take into account current readings of volatility and potential changes in volatility when trading. Market participants should also consider adjusting their position sizes with respect to how volatile a currency pair is. Trading a volatile currency pair might warrant 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 characteristics separating themost volatilecurrencies from currencies with low volatility readings. Traders should also know how to measure volatilityand have an awareness of events that might create big changes in volatility.