What is volatility in the forex market?

Forex volatility measures overall price fluctuations over a certain time, how rapidly a market’s prices change in the forex market. It is merely the standard deviation of returns. High liquid assets, such as major forex pairs, have low volatility and move in smaller increments.

Which Forex Pairs Move the Most?

In the last several years, the most volatile forex pairs  (forex pairs that move the most) are exotic (SEK, HUF, TRK) and GBP cross pairs such as GBPNZD GBPCAD. On the other hand, the least volatile currency pairs are EURCHF, EURUSD, AUDCHF, USDCHF, EURCAD, etc.

But let us start with the explanation…

Let us define volatility and see the difference between risk and volatility:

Difference between risk and volatility

Volatility is not always a bad thing because it can be an opportunity in trading. However, there is a difference between risk and volatility. Volatility is not the same as a risk because volatility is merely the standard deviation of returns. Risk is the chance that an outcome or investment’s actual gains will differ from an expected outcome or return.

Forex markets are the largest markets when it comes to market share and trade volumes. The daily turnover is a little over $5 trillion, one of the highest in all markets worlds. In Forex markets, currency pairs are quoted and are placed against each other. Thus, the currency pairs are dependent on other currency pairs.

If volatility Variation = Average (Higher – Lower), then:

The most volatile forex pairs 2021 based on variation are:

• AUDJPY (average volatility of 1.12%)
• AUDUSD (average volatility of 1.07%)
• EURAUD (average volatility of 1.07%)
• NZDJPY (average volatility of 1.05%)
• GBPAUD (average volatility of 1.05%)
• GBPNZD (average volatility of 1.05%)

As we can see, the most volatile currency pairs in the Asian session (major pairs) are AUDJPY and AUDUSD based on price variation for the last 5 years. On the other hand, the most volatile currency pairs in the New York session are USDMXN, USDNOK, EURNOK, while the most volatile currency pairs’ major forex pairs are GBPJPY and GBPUSD.

Who moves the forex market the least?

The least volatile currency pairs

Based on price variation, currency pairs with low volatility are EURCHF, EURUSD, AUDCHF, USDCHF, and EURCAD. Thus, the major currency pairs are generally less volatile than the emerging market currency pairs.

While some of the currency pairs have high correlation while others are comparatively less correlated, this correlation of the currency pairs bifurcates primarily into two types: positive and Negative Type Correlation. When a couple of currency pairs move side by side or in tandem, it is positively correlated, whereas a negative correlation occurs when the opposite happens. As a result, traders have a general trend to avoid making any trade on more volatile currency pairs.

So, which forex pairs are generally the most moving?

Currency Pairs Types

The major types of these currency pair types are Major, Minor, and Exotic Pairs.

1. Major Pairs

The currency pairs that are the most traded ones globally are termed the major currency pairs. They are known for their huge liquidity and lowest spreads. Listed below are some of them:

– USD/EUR (US Dollar/Euro)

– USD/CHF (US Dollar/Swiss Franc)

– USD/JPY (US Dollar/Japanese Yen)

– AUD/USD (Australian Dollar/US Dollar)

– CAD/USD (Canadian Dollar/US Dollar)

– GBP/USD (British Pound/US Dollar)

– USD/NZD(US Dollar/New Zealand Dollar)

One thing noticeable about these major pairs is that they have a US dollar occupying one of the sides because the US Dollar is undoubtedly the leading currency reserve globally, and about 88% of the forex trade happens in USD.

2. Minor Pairs

These are the currency pairs that do not have USD on one of the sides. The three active minor currency crosses form the minor currency pairs, such as the yen, the Euro, and UK GBP. Here’s the list:

– GBP/EUR (British Pound/Euro)

– EUR/CAD (Euro/Canadian Dollar)

– EUR/CHF (Euro/Swiss Franc)

– GBP/JPY (British Pound/Japanese Yen)

– GBP/CHF (British Pound/Swiss Franc)

– CAD/JPY (Canadian Dollar/Japanese Yen)

– CHF/JPY (Swiss Franc/Japanese Yen)

– GBP/AUD (British Pound/Australian Dollar)

– GBP/CAD (British Pound/Canadian Dollar)

3. Exotic Pairs

This pair comprises a bigger and stronger currency along with a smaller currency of a developing country. They generally have very high spreads. Here we have listed some exotic pairs:

– EUR/TRY (Euro/Turkish Lira)

– USD/NOK (US Dollar/Norwegian Krone)

– USD/SEK (US Dollar/Swedish Krona)

– USD/DKK (US Dollar/Danish Krone)

– USD/ZAR (US Dollar/South African Rand)

– AUD/MSN (Australian Dollar/Mexican Peso)

– USD/HKD (US Dollar/Hong Kong Dollar)

– NZD/SGD (New Zealand Dollar/Singapore Dollar)

Exotic currency pairs are the most volatile and moving, such as USD/SEK, USD/BRL, and USD/DKK.

Cross rates related to GBP such as GBP/NZD, GBP/AUD, GBP/JPY, and GBP/CAD are the currency pairs with the highest volatility. These cross pairs move for more than 200 points (pips) per day on average.

Below is a table – forex Daily volatility in the last several years :

Forex traders have to be careful of deviations in any currency pairs they are trading and all other currency pairs and correlations for effective risk management.

Positive or negative correlations of currency pairs give the traders an overview and a clear picture of the direction they should be trading and avoid.

In the forex trader’s best interest, focus on a currency pair with great potential and avoid choosing highly volatile currency pairs.

Since volatility is a crucial parameter that needs to be measured to understand market conditions, several ways of measuring volatility are listed below.

Volatility Measure

This helps in determining a current position. Listed below are the indicators that are used commonly:

1. Tue Average Ranges (ATR) – the best tool

Created by J.W. Wilder, this is widely used in measuring the price changes in currency. In addition, this is a widely used indicator in forex.

2. Moving Averages

The four major types of Moving Averages are:

– Simple

– Smoothened

– Linearly Weighted and

– Exponential MA

MA indicator helps us understand the market trend directions, whether they are trending upward downwards, and any possibility of reversals. They also help determine any flat market if the price neither increases nor decreases.

3. Donchian channels

This is one of the technical indicators that help measure relative volatility with other financial instruments. This indicator applies to almost all types of financial products, be it equities, futures, or currency markets, for that matter.

Thus, we have covered the three prescribed ways of measuring volatility. As a forex trading, you must know about the volatility and ways to measure the currency’s price volatility.

Key factors that affect Volatility

While trading in volatile currency pairs, technical aspects like resistance levels, support, price patterns should be considered. Traders should remain updated with the latest Forex prices, supply, demand, political events, analysis, and news. They should be aware that any data released will affect volatility. Usually, technical analysis will be used by traders to measure volatility. Volatile currency pairs will show more price movement, and also, the price movement will be more frequent. Exotic currency pairs, including currency from the emerging markets, will be more volatile since their economies are more unstable and the liquidity is also limited.

Many factors impact the market and affect its volatility. However, there are certain things that you must be aware of as a forex trader:

– Volatile currency pairs follow the technical areas for forex trading, like price patterns, resistance levels, support, etc.

– You must stay updated with all the latest forex news and forex pair price and analysis so that you can analyze the market better.

– Any type of release of data can impact the volatility of currency pairs.

– Technical analysis helps the traders with measuring volatility.

Apart from these factors, a forex trader must know what’s happening worldwide, such as massive news events like Brexit and trade wars that have massive impacts on volatility.

Whenever a trader starts trading, he trades by speculating on a currency to get stronger or even weaker than the other, and if it achieves what the trader speculates or the goal, a profit is made.

Now that you know the factors let’s look at some major types of currency pairs.

Most fluctuating currency pair in 2020.

Research in South Africa indicates that more volatile currency pairs are usually more profitable since their prices fluctuate more rapidly. However, trading in the most fluctuating currency pair can also increase the risk involved. The factors affecting the foreign exchange (Forex) rate for all the currency pairs remain similar, geopolitics, the country’s economy issuing the currency, exports, imports, and differences in interest rates. In addition, extremely volatile currency pairs are usually less liquid compared to the more stable currency pairs. Hence a well-planned strategy for risk management and trading is required.

List of most common traded forex pairs with high volatility

AUD (Australian dollar) /JPY(Japanese Yen): This currency pair is volatile since the AUD value is inversely related to the JPY. The AUD price is related to the value of Australian exports of metals, minerals, and other items, making it a commodity currency. The Japanese currency is preferred by investors when there are economic problems, making it a haven. So the value of this currency pair fluctuates rapidly depending on the outlook for the world economy.

New Zealand Dollar(NZD)/ JPY(Japanese Yen): The value of the NZD is linked to the agricultural exports of New Zealand, making it a commodity currency like the AUD. Some of the major exports are honey, meat, eggs, and wood. Therefore, any change in the value of these commodities will affect the currency pair.

British pound(GBP) /Euro(EUR): Following the Brexit, the pair’s volatility has increased. However, this could decrease in the future.

Canadian dollar(CAD)/ Japanese yen(JPY): The value of the CAD depends on the price of oil, making it a commodity currency, while the Japanese yen is a haven

British pound(GBP) /AUD(Australian dollar): Since Australia is a commonwealth member, the British and Australian economies are historically linked. Therefore, the price of the AUD is closely related to the Australian export value. There has been a decrease in Australian exports to China, increasing the volatility since the United States started its trade war with China.

US dollar(USD) /South African rand (ZAR): Gold is one of the major exports from South Africa and is priced in US dollars. This pair’s volatility depends on the gold price, with the exchange rate increasing with a gold price increase.

USD/South Korean Won(KRW): The KRW was formed after the second world war, and trades at 1000:1 against the US dollar

USD/ Brazilian real(BRL): This currency pair value is frequently fluctuating, making it popular among day traders and other traders with a scalping strategy

USD/Turkish Lira (TRY): The Turkish Lira is extremely volatile after the failed coup in 2016. There are major changes in Turkish politics, society, resulting in fluctuations in currency value. Hence traders are closely monitoring the currency pair due to the uncertainty involved.

USD/Mexican peso (MXN): Due to the increase in disputes between the country, and change in tariff rate, has increased the volatility

How trading strategy differs depending on volatility levels

The more volatile currencies will have their value changed over more pips compared to less volatile currencies. Hence it is riskier to trade in highly volatile forex pairs. These highly volatile currencies are more likely to slip and make bigger moves, so it is more important to select the position’s right size while trading. The major currency pairs are less volatile. These pairs are EUR/USD, GBP/USD, USD/CHF, and USD/JPY

Trading considering forex volatility

Traders who wish to trade in forex taking advantage of the volatility should take the following measures.

– find a suitable forex pair for trading

– analyze the fundamentals and technical aspects of the forex pair

– finalize a strategy for forex trading

– create a forex account for trading, depositing funds

– Open a position, monitor it, and close it

Volatile and stable currencies

The prices of different commodities are always changing. Volatility is often associated with the fluctuation in prices. For forex traders, volatility is one of the most important factors considered while opening or closing any trade. Financiers assess the risk involved by checking the volatility. If the market is extremely volatile, they may reduce their transactions since they will likely make more losses. Historical volatility is the standard deviation in the asset’s values, calculated using its historical prices. Expected volatility is calculated using current prices and the expected risks.

Almost every currency can be volatile for some time. However, some currencies are more stable compared to others. These currencies usually represent economies with a low inflation rate, stable balance of payment, trade indicators, political system, balanced accounts for the government, predictable government monetary policy, diversified economy with goods and services. Though volatility patterns are changing, a few currencies are considered more stable than others by financial experts. The currencies are Hong Kong, New Zealand, Singapore dollar, Norwegian Krone, and Swiss franc.

The governments in these countries maintain transparent government financial records, do not interfere in forex markets. As a result, the major currencies for forex trading like the US dollar, Euro, British pound, Chinese renminbi, and Japanese yen are also fairly stable. In contrast, some emerging market countries’ currencies are extremely volatile since they are affected by global demand and supply and local policy changes. These currencies are the Russian ruble, Brazilian real, Mexican, and Argentine peso.

Forex correlation pairs

Forex correlation represents the positive or negative relationship between two separate currency pairs. Positive correlation 100% means that two pairs increase or decrease at the same level during the time. For example, EURUSD and USDCHF have a negative correlation because

Non-correlated forex pairs

Non-correlated currency pairs do not have either positive either negative relationship, such as  USD/CHF, USD/JPY, USD/CAD or NZD/USD, AUD/JPY, EUR/CAD, GBP/CHF. For example, EURUSD and USDCHF are not non-correlated pairs – they are negatively correlated pairs. This is because non-correlated pairs do not have any relationship, and logically these pairs are from different markets such as EURCAD and AUDJPY.

Forex correlation and forex volatility are separate terms, and there is no evidence that correlation increase or decrease volatility.

Conclusion

So, in the end, we can conclude that the forex market is full of irregularities. Hence, it is important to keep a close eye on the market determinants and indicators that measure the volatility. Hence, a Forex Trader should be well-versed with forex currency pairs and know what factors make currency pairs volatile and which forex pairs move the most. That will ensure some certainty, stability, and most importantly, some peace of mind for you.