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The most historically volatile forex pairs
Saxo Group
When you first start forex trading, you’ll quickly notice that volatility can be a double-edged sword. On one hand, those big price swings can potentially lead to great profits. On the other, they can catch you off guard and turn against you. To minimize unpleasant surprises when trading, it is important to know which currency pairs are the most volatile and safeguard your capital.
In this guide, we’ll take a look at the most volatile forex pairs you can trade today. We’ll explore what causes their ups and downs and share some tips on how to explore this exciting part of the market.
What is forex volatility?
Forex volatility refers to the degree of variation in the price of a currency pair over time. In simple terms, it measures how much and how quickly the price of a currency pair moves. Volatility is a critical factor in forex trading, as it can influence the potential for profit and the level of risk involved.
Volatility in the forex market is influenced by several factors:
- Economic indicators. Data releases such as GDP growth, employment numbers, and inflation rates can cause significant price movements in currency pairs. For example, a better-than-expected jobs report in the US might cause the USD to strengthen, increasing volatility in pairs like EUR/USD or GBP/USD.
- Geopolitical events. Political instability, elections, trade agreements, and conflicts can all lead to sudden changes in currency values. The uncertainty these events create often increases volatility as traders react to the news.
- Market sentiment. Traders' perceptions and emotions can drive volatility, especially during times of market uncertainty. For example, safe-haven currencies like the Japanese yen or Swiss franc may experience increased volatility during economic downturns as traders move their assets to safer investments.
- Interest rate differentials. Differences in interest rates between countries can cause currency pairs to fluctuate as traders want to capitalise on higher returns, contributing to volatility.
Understanding forex volatility is crucial for traders because it helps them select the right pairs to trade, time entries and exits, and manage risk effectively. Volatile currency pairs can offer lucrative opportunities, but they also come with higher risks.
How is forex volatility measured?
One of the most common ways to measure forex volatility is through the Average True Range (ATR). ATR is a technical analysis indicator that quantifies the degree of price movement in a currency pair over a specific period, typically 14 days. It calculates the average of the true range, which is the greatest of the following:
- The difference between the current high and the current low.
- The difference between the previous close and the current high.
- The difference between the previous close and the current low.
ATR is favoured by traders because it accounts for gaps in price movements and offers a continuous reading of volatility. Traders use ATR to better set stop-loss levels, identify potential trading opportunities, and manage risk effectively.
Example: Calculating ATR
Imagine you're analysing the EUR/USD currency pair over three days. Here's how the true range would be calculated for each day:
Day 1:
High: 1.2000
Low: 1.1900
Previous close: N/A (since it's the first day, there's no previous close)
True range calculation for day 1:
Difference between the high and low: 1.2000 - 1.1900 = 0.0100
Since this is the first day, the true range is simply the difference between the high and low, which is 0.0100.
Day 2:
High: 1.2050
Low: 1.1950
Previous close: 1.2000
True range calculation for day 2:
Difference between the high and low: 1.2050 - 1.1950 = 0.0100
Difference between the previous close and current high: 1.2050 - 1.2000 = 0.0050
Difference between the previous close and current low: 1.2000 - 1.1950 = 0.0050
The true range for day 2 is the greatest of these values, which is 0.0100.
Day 3:
High: 1.2100
Low: 1.2000
Previous Close: 1.2050
True range calculation for day 3:
Difference between the high and low: 1.2100 - 1.2000 = 0.0100
Difference between the previous close and current high: 1.2100 - 1.2050 = 0.0050
Difference between the previous close and current low: 1.2050 - 1.2000 = 0.0050
Again, the true range for day 3 is the greatest of these values, which is 0.0100.
Calculating the ATR
Now that we have the true ranges for three days, let's calculate the ATR. If we are using a 3-day ATR, we would average the true ranges from Day 1, Day 2, and Day 3:
Day 1 True Range: 0.0100
Day 2 True Range: 0.0100
Day 3 True Range: 0.0100
ATR = (0.0100 + 0.0100 + 0.0100) / 3 = 0.0100
This means that, on average, the EUR/USD pair moves 0.0100 (or 100 pips) per day over this period. Traders can use this information to gauge potential price movement and set stop-loss orders or take-profit targets accordingly.
The 10 most historically volatile pairs in forex
When it comes to forex trading, volatile currency pairs offer opportunities for significant profits due to their large price swings. However, these opportunities come with increased risks, making it essential for traders to understand which pairs are most volatile and why. Below, we explore the ten most volatile forex pairs you can trade today:
1. USD/ZAR (US Dollar/South African Rand)
The USD/ZAR pair is known for its extreme volatility. South Africa's economy is heavily influenced by commodity prices -particularly gold- and political instability, which can cause the ZAR to fluctuate sharply against the USD. The pair has been one of the most volatile, with large daily price movements offering high-risk, high-reward trading opportunities.
2. AUD/JPY (Australian Dollar/Japanese Yen)
The AUD/JPY pair is a classic example of a volatile currency pair due to the opposing nature of the currencies involved. The Australian dollar is a commodity currency, heavily influenced by global demand for resources, while the Japanese yen is often considered a safe-haven currency. This combination makes the pair highly sensitive to global economic shifts and market sentiment, leading to significant volatility.
3. GBP/AUD (British Pound/Australian Dollar)
GBP/AUD is another volatile pair, driven by the economic conditions and policies in both the UK and Australia. The British Pound has experienced increased volatility post-Brexit, while the Australian dollar's value is often tied to commodity prices and China's economic health. This combination leads to frequent and substantial price swings.
4. USD/TRY (US Dollar/Turkish Lira)
The USD/TRY pair remains extremely volatile due to Turkey's ongoing economic struggles, including high inflation, currency depreciation, and political instability. Recent shifts in Turkey's economic policy, such as changes in interest rates and government interventions in the currency market, have led to rapid fluctuations in the Lira's value.
5. GBP/JPY (British Pound/Japanese Yen)
Known as ‘the Dragon’ due to its aggressive price movements, the GBP/JPY pair is highly volatile. This pair combines the volatility of the British Pound with the safe-haven status of the Japanese yen, creating large price swings. It's popular among experienced traders looking for big moves within short time frames.
6. NZD/JPY (New Zealand Dollar/Japanese Yen)
The NZD/JPY pair exhibits volatility due to the New Zealand dollar's correlation with global commodity markets and the Japanese yen's role as a safe haven. The New Zealand economy, heavily dependent on agriculture and exports to China, sees its currency fluctuate in response to global market conditions.
7. USD/MXN (US Dollar/Mexican Peso)
The USD/MXN pair is influenced by both the economic policies of the United States and the economic conditions in Mexico, including its ties to oil prices. The Mexican peso can experience significant fluctuations against the US dollar, especially during times of economic or political instability in Mexico or changes in US trade policies.
8. USD/BRL (US Dollar/Brazilian Real)
The USD/BRL pair is highly volatile due to Brazil's political and economic instability. Changes in global commodity prices, particularly those related to agriculture and mining, also impact this pair significantly, making it a frequent choice for traders looking for large price movements.
9. CAD/JPY (Canadian Dollar/Japanese Yen)
The CAD/JPY pair's volatility is driven by the Canadian dollar's sensitivity to oil prices and the Japanese yen's role as a safe haven. Market developments in the energy sector and changes in global risk sentiment can lead to significant price fluctuations in this pair.
10. GBP/NZD (British Pound/New Zealand Dollar)
The GBP/NZD pair is among the most volatile crosses. The pound moves with UK monetary policy and political risk, while the New Zealand dollar is tied to commodity exports and Chinese demand. These contrasting drivers create wide daily ranges and sharp swings, making GBP/NZD a high-risk, high-reward currency to trade.
*Disclaimer: The currency pairs mentioned above are for informational purposes only and should not be construed as advice or Saxo’s recommendations. All types of trading involve risk, and returns are never guaranteed. It is essential to do your own research and consider your trading needs before participating in the forex market.
How to trade forex pairs with high volatility
Trading volatile forex pairs presents both opportunities and challenges. While the potential for substantial profits exists, the risks are equally significant. As a result, traders need a well-thought-out strategy, sound risk management, and a clear understanding of market conditions.
1. Understand the market environment
Volatile forex pairs are often influenced by economic events, geopolitical developments, and changes in market sentiment. Keeping up with the latest news and developments that may impact the currencies you are trading is crucial.
Economic data releases, such as GDP figures, employment numbers, and central bank decisions, can trigger significant price movements. Understanding these factors helps in anticipating market moves and making informed trading decisions.
2. Use technical analysis tools
Technical analysis is a vital tool when trading volatile forex pairs. Indicators like Bollinger Bands, Average True Range (ATR), and Relative Strength Index (RSI) help traders gauge market volatility and identify entry and exit points.
For example, Bollinger Bands can show how much a currency pair deviates from its average price, giving you insight into potential breakouts or reversals. ATR, on the other hand, measures the average range of price movement over a specified period, offering a sense of how much a pair typically moves on a given day.
3. Have a risk management strategy in place
With high volatility comes the potential for significant losses, so risk management is crucial. Consider using stop-loss orders to limit potential losses if the market moves against you. Additionally, adjusting the size of your trades based on the level of volatility can help manage risk.
For example, in highly volatile markets, smaller position sizes can reduce the impact of adverse price movements on your overall portfolio.
4. Choose the right trading strategy
Different trading strategies can be effective depending on your goals and the level of volatility in the market. Here are a few to consider:
- Scalping. This involves making multiple trades throughout the day, aiming to profit from small price movements. Scalping can be particularly effective in volatile markets, but it requires quick decision-making and a high level of focus.
- Swing trading. It involves holding positions for several days or weeks to capture price swings. This strategy allows traders to benefit from significant price movements without the noise of intraday fluctuations.
- Breakout trading. Breakout traders look for key support or resistance levels and enter trades when the price breaks out of these levels. In volatile markets, breakouts can lead to substantial price movements, offering profitable opportunities.
5. Monitor your trades closely
Volatile markets can move rapidly, so it's important to monitor your trades closely. Setting up alerts and regularly checking your positions ensures you can react quickly to market changes. This vigilance helps you adjust your strategy as needed and capitalise on new opportunities.
6. Stay emotionally disciplined
Trading in volatile markets can be stressful, especially when prices move quickly. It's essential to remain disciplined and stick to your trading plan, avoiding impulsive decisions driven by fear or greed. Emotional discipline helps you prevent costly mistakes and ensures you make decisions based on analysis rather than emotions.
7. Use leverage with caution
Leverage can be a tool to potentially grow your profits, but it also increases your risk. In volatile markets, high leverage can lead to significant losses if the market moves against you. Use leverage conservatively, especially when trading volatile pairs, so you can protect your capital.
8. Adjust your strategy if needed
Regularly back test your trading strategy using historical data to understand how it performs in different market conditions, including periods of high volatility. Adjusting your strategy based on these insights helps you stay profitable and adapt to changing market environments.
9. Time your trades
Volatility often peaks during major market sessions like the London and New York sessions. Timing your trades during these periods can provide more opportunities for capturing significant price movements. However, it's also important to be aware of the increased risk during these times.
Conclusion: Seizing opportunities in volatile forex pairs
When it comes to trading forex, you can’t avoid uncertainty and volatility. But if you are well-prepared, you may be able to find opportunities to take advantage of market changes.
As a first step, become familiar with the forces driving these currency price fluctuations – whether they are geopolitical turmoil, or changes in economic data or market sentiment. Take steps to protect your capital by diversifying your portfolio and managing your risk with tools like stop-loss orders. You should also be mindful to keep the use of leverage to a level you can accept.
The market can go one way or the other. The goal isn't to hit a home run with every trade, but to stay in the game long enough to see your strategy pay off. So, focus on being prepared, staying patient, and keeping your emotions in check – so that when opportunities arise, you can seize them.
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