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Volatility is something that all traders will have to face over the course of their trading careers. While there are certain currency pairs that are less volatile to trade, all currency pairs can fall victim to wide price swings in a short period of time.
In this article, we’ll take a look at the most volatile and least volatile currency pairs and how they both can be traded effectively.
The most volatile currency pairs are the most exotic ones. The currencies that comprise what are considered to be more volatile halves of a pair usually come from countries that have a less diversified economy than that of the more stable, less volatile, larger economies. Low inflation, stable trade, stable governments, and predictable monetary policies are indicators of a currency that is more likely to be less volatile.
The pairs which see the most price movements over the course of a trading day are:
The major pairs are much less volatile. Only the USD/GBP moves over 100 points a day.
In terms of cross rates, the most volatile pairs are:
The least volatile pairs according to cross rates are:
The higher the liquidity of a currency pair, the lower the volatility of that pair will be. The higher the supply and demand of a currency pair are, the harder it will be to move the overall price of the pair, thus keeping volatility low.
Conversely, if there are a low supply and low demand, the price of a currency pair can move more dramatically and therefore higher volatility is possible. This behavior is seen more frequently in less used currency pairs. These pairs are therefore more volatile because their supply and demand are generally lower than the bigger, more commonly traded currency pairs. Currency pairs of combinations that are widely used and in circulation are more stable and less volatile.
Volatility is also possible in the wake of big economic announcements when a sudden jolt in the market is possible. Big announcements have the power to sway and move prices and sometimes even the bigger, more in-demand currencies are heavily influenced by these news events.
Since the range of the more volatile currency pairs is wider than the less volatile, it is tempting to think that they are therefore better pairs to trade. Since they move in a wider range, the payoff from a winning trade would seemingly be larger than a win on a more stable pair.
This is partially true, however, since they are more exotic and less in demand, there is less liquidity and therefore quite a bit of risk.
The biggest risk facing traders who trade volatile currency pairs is that well thought out, carefully constructed technical analysis, might not be valid when applying it to these more volatile currency pairs. The reason is that technical analysis is based on the most liquid assets in the market. If you’re trading assets that are less liquid, they are less beholden to the dominant forces that help predict price movements. These difficulties and uncertainties make trading the more volatile pairs more difficult and not well suited to inexperienced traders. For new traders, the dominant, more stable, and liquid pairs, are a better and safer investment.
Traders looking to trade lower volatility pairs may favor a strategy of swing trading. Once a currency in the range has been identified, traders can set support and resistance. After this, entry points can be made. Stop losses can be set just under the level of a purchase order.
For traders who want to trade high volatility currency pairs, they can also trade within a range of time but traders need to be well aware of the fact that these pairs are often subject to erratic movements and unexpected breakouts. With low volatility pairs, breakouts might indicate a continuation of a trend, however, with high volatility pairs, this doesn’t always hold true.
Prices of high volatility currency pairs may move rapidly and traders might be faced with the possibility that their trades cannot be made where they have chosen their entry and exit points. Strategies can be similar to those used with low volatility pairs but will require tweaks in order to avoid the problems associated with high volatility pairs.
As we mentioned at the start of this article, volatility can happen at almost any time to any currency. However, since there are pairs that are historically more volatile than others, traders can look for the telltale signs of volatility. This is whether you want to trade volatile currencies or whether you want to avoid them. In addition to historical trends, staying on top of the news and big announcements can be key to tracking volatility. While it’s a good idea to avoid trading during high volatility in order to minimize risk, trading during volatility can also bring back windfall returns. Ultimately, whether or not to trade highly volatile pairs is up to each trader and should be decided upon after a close examination of risk and skill.
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