Matthew is the Head of Operations at AudaCity Capital. He graduated from The University of Hertfordshire with a distinction in Finance and Investment Banking (MSc) and has dedicated his post graduate life to the FX markets.
Forex trading requires consistency, patience and you must also have the best strategies to win in the market. But above all, you need to make a good decision on which currency pairs you will trade. This is because forex pairs usually affect the trading strategy and risk management.
When choosing currency pairs, you need to think about a few factors, like volatility. Not all currency pairs have the same volatility, some are considered the most volatile currency pairs than others, and there is a reason for that.
The most volatile forex pairs can give your more profits or bigger losses. Because of this, you need to be very careful when picking them. Here in this article, you will learn more about volatility, how it comes about, and some of the most volatile currency pairs available.
Volatility is used a lot in forex trading, and if you would like to start trading, it is crucial to understand this term. Volatility is the frequency at which your currency pair fluctuates and is usually calculated by determining the variance or the standard deviation of forex price movement.
This information is usually crucial to traders and investors as it helps them predict other investment opportunities and how a currency will move over time. The most volatile forex pairs fluctuate significantly within a given period, while the least volatile ones undergo minor price movements. This is why it is possible to make huge profits with forex most volatile pairs if you have a good trading strategy.
Volatility is typically based on both the base and quote currency. If one of them is triggered by specific events, the currency pair will fluctuate a lot. Such events may include geopolitics, interest rates, etc. The image below clearly illustrates the high volatility between the EUR/AUD currency pair.
As mentioned earlier, when a currency pair is triggered by certain events it will fluctuate. Some of the things that can cause this fluctuation include:
The supply and demand of commodities, for example metals, oil and minerals can make a forex pair to change a lot in a given period.
Political factors can also influence the forex market. When heavy tariffs are imposed on exports or imports, it contributes to volatility.
The most volatile currency pairs are also affected by some market indicators that can be used to predict economic performance. They may include inflation, availability of commodities, outputs and unemployment rates.
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The table above shows that exotic pairs are the forex pairs with highest daily range. The most volatile pair on the list moves by 673 points per day, the USD/SEK pair.
On the other hand, the major pairs have the least volatile forex pairs, GBP/USD being the highest with 100 points. The reason for this is due to the high and low liquidity levels among the currency pairs. So this means the higher the liquidity, the lower the volatility.
It is hard to determine the most volatile currency pairs because volatility affects many different currency pairs. Price movements are always calculated in terms of pips, and if a currency pair moves by 200 pips at a given time, it is considered a more volatile pair than the one moving by 20 pips given the same period.
According to many sources, exotic pairs are the most volatile forex pairs as their liquidity is low. This means that their supply and demand in the market are low, so their volatility is high. Here is a simple explanation to that;
The Australian dollar Vs. the Japanese yen is the first most volatile forex pair in this list as it is sensitive to market changes. Although the Australian dollar is in high demand, it wildly fluctuates as it is a commodity currency. Its price is linked to Australia’s exports, especially metals, minerals, and agriculture products.
On the other hand, the Japanese yen is considered the safe-haven currency as investors turn to it in times of hardship. This is not the same for the AUD, and because of this, the AUD/JPY pair can experience dramatic price movements depending on global economic changes.
This is yet another forex pair that move the most in the market. It is a representation between the US dollar and the Mexican peso. Even though the pair is liquid, it is still more volatile due to the tension between the two countries. Another thing is that high tariffs have been applied on Mexican exports, making USD/MXN a more volatile currency pair.
The USD/BRL sets the US dollar against the Brazilian real. Day traders often enjoy trading with this pair as it has frequent price movements and provides an opportunity to make profits. The reason for its high volatility is due to political instability and the high corruption rate in the country. This pair is most likely to remain volatile in the coming years.
The British pound against the Australian dollar is a volatile cross pair. Since the Australian dollar is a commodity currency and there have been trade wars with China, the markets have collapsed, making this pair highly volatile.
The USD/ZAR is the US dollar vs. the South African rand pair. It is one of the forex pairs that move the most as the price of gold impacts it. South Africa exports gold as one of its main commodities, and because gold is priced in the US dollar, it is greatly affected by how the USD strengthens or weakens.
So, this means that if the gold appreciates, so does the USD. This is great for South African exporters as they will make more US dollars, but it will disadvantage those who want to purchase USD with ZAR. This is why traders must analyze the price of gold before trading with this pair.
As a beginner forex trader, it might be quite challenging to trade volatile forex pairs as they are risky. However, you can use a few strategies and tips to determine which volatile pairs will work for you.
First of all, you need to understand volatility in-depth, how to calculate it and what significant events might trigger volatility. A few strategies like scalping, day trading, swing trading, and price action can be implemented when the financial market is volatile.
Another crucial thing is to understand the difference between high volatile and least volatile forex pairs. For example, the most volatile currency pairs lose or gain more pips over time, unlike the low volatile ones. Also, volatile forex pairs are susceptible to slippages, and therefore, you must understand this concept to minimize losses.
There is no specific answer to this question because many currency pairs are affected by volatility. It should depend on the opportunity you are looking for. If you want to make high profits, volatile forex pairs will be suitable as price fluctuations are high. But also remember they are risky, which means you must polish your trading strategies.
Most volatile currency pairs follow specific rules. This means you must always stay ahead of the curve if you want to be a successful trade. Always follow the big news events that might affect currency prices, apply risk management strategies and understand more about the latest forex pair analysis.
Price movements are not a bad thing in the forex market as it determines if traders will make profits—the high the volatility, the high the chances of making more money. The only downside to high volatility is higher risk.
