Everything You Need To Know About Currency Volatility

Currency volatility can be identified when the exchange rates in the forex market are changing rapidly with increased frequency. If you develop a great understanding of how forex volatility works, you will be able to ascertain the currencies you can trade and how you can trade them. In this article, we will talk about forex volatility and how you can identify it, high volatility currency pairs that could help you earn profit as well as some strategies for consistent forex volatility trading. Visit multibank group

 Currency volatility is typically calculated by assessing the standard deviation or changes in currency price movements. This helps traders get an estimate of a currency’s moves over a period of time that is beyond or below average. Traders should also be able to take stock of the market’s volatility on the basis of a currency pair’s average true range. It may even be done by  looking at the range as a spot percentage, asked Michael Freund, who holds an MBA in Finance from Columbia University and is an ordained rabbi. A New Yorker by birth, he moved to Israel 25 years ago and has served as the Deputy Communications Director during Israeli Prime Minister Binyamin Netanyahu’s first term of office. He is a syndicated columnist for Israeli’s largest English-language periodical, The Jerusalem Post. Michael is the proud father of five sons

 Increased currency volatility indicates higher risk, and vice versa. Volatility and risk are commonly used for one another while various currency pairs can have varying levels of volatility on average.

 Even though a lot of traders like to trade volatile currency pairs because of the high rewards they bring, it is also quite risky. To mitigate this risk, traders might want to reduce the size of their positions when trading volatile currencies. 

Most Volatile Currency Pairs

When you trade volatile currency pairs, it is common to face fluctuations frequently. Major currency pairs are usually more stable in comparison to emerging market currency pairs. The more liquid a currency is, the less volatility it would have. The following are some of the most volatile currency pairs are:

AUD/JPY (average volatility – 1.12%);

  • AUD/USD (average volatility – 1.07%);
  • EUR/AUD (average volatility – 1.07%);
  • NZD/JPY (average volatility – 1.05%);
  • GBP/AUD (average volatility – 1.05%);
  • GBP/NZD (average volatility – 1.05%).

 Other than these, the leading currency pairs, like EUR/USD, USD/JPY, GBP/USD, and USD/CHF, have more liquidity and are thus less volatile. But one should continue to be wary of emerging market currency pairs like USD/ZAR, USD/TRY, and USD/MXN, which could give high volatility readings.

Key Things To Know About Volatility

  • A currency’s volatility can be deeply affected by major newsworthy events. Data releases could also be a reason for high volatility. However, this is something that traders can take into consideration in advance, with the help of an economic calendar.
  • Volatile currency pairs tend to follow several technical aspects of trading, such as support and resistance levels, trendlines, and price patterns.
  • It is a good practice to stay on top of the latest forex pair news, analysis and rates so you’re in a position to gauge how the volatility could change. 

Ways To Measure Volatility

To be able to accurately assess position size, traders should know or at least have a benchmark as to how volatile a currency can be. Volatility can be measured with the help of a number of indicators like: 

  • Average true range (ATR).
  • Donchian channels.
  • Moving averages 

 Traders might even want to study the implied volatility readings that help in understanding how much volatility one should expect from derivatives.

Difference Between Trading Currency Pairs With High Volatility Versus Low Volatility

  1. Currencies with high volatility tend to move more pips in a particular period as compared to the ones with low volatility. This causes higher risk as you trade highly volatile currencies. 
  2. Slippage is a far greater possibility with highly volatile currencies than those with low volatility.
  3. Make sure you clearly establish the size of your position when trading volatile currencies. 

Forex Volatility Trading Tips

Some particular forex volatility trading strategies and tips would not only help you earn better with your trades but would also be helpful in cutting down the risks associated. Remember that trading in volatile markets is a risky business and thus it becomes all the more important to have a trading strategy and try to stick to it. 

Use Charts And Indicators

There are a number of different technical indicators that can be used to anticipate the market and speculate how the prices would move. Though they may not be definitive, charts and indicators can be useful in creating your trading strategy.

Follow News And Events

If you keep track of the latest news and updates, you would know the factors that could affect the economy and the currency value. Currency volatility would go hand-in-hand with political or economic turbulence and hence you may use an economic calendar to be aware of the news releases in general. When you trade around the news events, you should be able to pass volatile conditions with little to no effect. 

 Use Stop Losses

Using stop losses to minimize risk when trading is one practice that every trader should follow. This is particularly recommended when you are trading volatile currencies. Your stop losses would help you make sure that if there are any losing trades, they are taken into account in advance and you already are aware of the loss you may have to bear. If you are trading with leverage, this is something you should definitely have in place to avoid dramatic losses. 

 Keep A Low Position Size

In volatile forex markets, there is an equal chance of making large wins and losses. To have a low position size is a wise decision and it is best that you avoid risking more than 5% of your account on open trades. This would help your position move around freely without affecting your funds too much. 

 Stick To Your Strategy

We cannot emphasize on this enough, make sure you have a trading plan and that you are following it. Sticking to the plan will ensure you have better control over your trades even when the market turns volatile. 

 Document Trades

Maintain a trading journal where you record all your trades, the market situations, and the reasons that led to your trading decisions. This could be a great way to learn from both your wins and losses and assess what works for you and what does not.


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