You are probably familiar with the concept «volatility». If not, we recommend you to get more information on the subject before reading this article.
The present article is about the most volatile currency pairs in the Foreign Exchange (Forex) market in 2019.
We should note that by definition volatility tends to change over time and is not a constant.
Volatility is Relative
If you have ever traded in the Forex market or at least watched price movements from the sidelines, you might have noticed that prices move non-linearly on the chart.
At some times the price of a currency makes no headway or moves within a very narrow range. If this is the case, people say that there is a low volatility in the market.
On the other hand, when key economic data are published or officials speak, the market price makes sharp and strong moves. If so, it is said that there is an increase or even a spike in volatility.
In order to visually illustrate the non-constant nature of volatility let’s look at the Forex Volatility Calculator – http://investing.com/tools/forex-volatility-calculator.
All you need to do before you start using the tool is to enter time period, over which you need to measure volatility, in weeks.
Let’s take NZD/USD (New Zealand vs. US dollar) as an example for volatility changing over time. To do this, just enter the period of “4” weeks on the above-mentioned website and let it calculate the
volatility. After doing so, we will obtain the following results in the form of 3 diagrams:
These diagrams show the average volatility of NZD/USD currency pair for every day since July 1. It also shows an average weekly, daily and hourly volatility.
Based on all those 3 diagrams we conclude from observation that volatility tends to change during any period of time.
The hourly volatility diagram for NZD/USD, where peaks can be seen at 12 and 21 o’clock (GMT time), is of a particular interest. It fully coincides with the time of economic data releases for the USA and New Zealand.
It supports the thesis on an increase in volatility upon major economic data releases mentioned at the beginning of the article.
Change in volatility can be observed in all currency pairs. You can select any currency pair by yourself and get the statistics of its volatility over different time intervals.
What Does Volatility Depend On?
What does volatility of any currency pair depend on?
The main reason for volatility is liquidity. A classic rule states that: the higher the liquidity, the lower the volatility, and vice versa.
In fact, liquidity is the amount of supply and demand in the market. It means that the larger the supply and demand, the harder is it to get the price moving.
According to that rule, we can make a conclusion that exotic currency pairs are the most volatile ones in the Forex market because their liquidity is often lower than that of major pairs.
Volatility often occurs during major economic data releases as well, so it may be of use to download and install MT4 news indicator:
It can help to protect yourself against an unexpected market activity.
Let’s use statistics to verify the previous statements.
For the purpose of study let’s take 7 major currency pairs, cross and exotic currency pairs, and draw up a comparative table on the basis of the obtained data.
Table of The Most Volatile Currency Pairs
The Most Volatile Currency Pairs – The table shows that today the most volatile Forex pairs are exotic ones. Namely, USD/SEK, USD/BRL, and USD/DKK. All of them move for more than 400 points per day on average.
The volatility of the major currency pairs is much lower. Only GBP/USD, USD/JPY and USD/CAD move for more than 100 points per day. EUR/USD turned out to be the least volatile currency pair.
As for the cross rates, GBP/NZD, GBP/AUD, GBP/JPY, and GBP/CAD are the currency pairs with highest volatility. All of them move for more than 200 points per day on average.
EUR/CHF, CAD/CHF, AUD/CHF and EUR/GBP differ like less volatility Forex pairs among the cross rates. The amplitude of their movements doesn’t exceed 90 points per day.
The Bottom Line
The reader may conclude on the basis of such statements that trading in exotic currency pairs or cross rates promises large profits. However, it isn’t quite that simple. Indeed, the range of exotic pairs’ movements is much broader than that of the major ones.
However, such a high volatility is a result of low liquidity, and trading in low liquidity currency pairs carries particular risks for a trader.
The fact is that various technical analysis techniques might not work in such situations. That is, if you decide to trade, say, in USD/SEK or GBP/NZD, your analysis may not work as effectively as, for example, when trading EUR/USD. Also technical analysis patterns might generate false signals.
This is because the psychology of the market behavior in its most liquid form makes up the backbone of technical analysis. If the liquidity of a trading instrument is lower, the validity of technical analysis comes under question.
The second problem a trader can face when trading in volatile financial instruments is a wide spread (additional trading expenses).
Of course, we shall never advise you not to trade in currency pairs with low liquidity. However, our task is to warn inexperienced traders and newbies that the risk of such trading is higher than that of trading in classic currency pairs.