Forex trading is a potentially high-profit business, as long as you know what you are doing. The concept is fairly simple – you simply buy a currency with another, timing your trades correctly to gain profits. However, there are several factors that come into play in forex trading, and not all of these are under your control. Apart from skill and trading strategies, there are external aspects to consider, like volatility. In this article, we will talk about what volatility is and briefly discuss how it impacts trading decisions. We will also list some of the most volatile forex pairs that you can trade today.
What Does Volatility Mean in Forex Trading?
The exchange rate of any currency pair continuously changes over time. Volatility refers to how much these forex prices fluctuate. The more fluctuations there are in a forex pair’s price, the higher the volatility of that pair. In forex trading, volatility can be good or bad, depending on which particular forex pair you are trading. It also depends on the kind of trading strategy you are using.
What Causes Volatility in the Forex Market?
Forex pairs all have different levels of volatility. Why is this so, when we are all trading them in the same global financial market? The simple reason is that there are so many factors that impact a currency pair’s volatility.
Economic Indicators
There are some key numbers that indicate the economic conditions of a country. These numbers have an impact on that country’s volatility. This includes the GDP or gross domestic product, inflation rates, rate of employment, and so on. If current numbers are strong, this would have a positive impact on relevant currencies. Weak numbers, on the other hand, can cause forex values to plummet.
Political Unrest
What goes on in politics has a massive impact on forex volatility. If there are tensions between two countries, for instance, the price of their currency pair can be greatly affected. Similarly, global conflicts, trade tensions, or elections can also result in erratic movements in the prices of currencies. In general, any news or updates that might have an impact on a country’s economy will almost surely affect the forex market.
Market Sentiment
Trader sentiment matters a lot when it comes to forex volatility. During times when traders seem to be going for a safer route, the more stable currencies like USD or JPY become even stronger. At the same time, less reliable currencies can drop in value.
Natural Calamities and Disasters
Even these occurrences that are out of human control can also cause shifts in the forex market. The COVID pandemic is a very recent example that has severely disrupted the forex market.
Liquidity
When there is a constant flow of buying and selling of a certain forex pair, we say that the market is liquid. As a rule, the higher the liquidity, the lower the volatility. On the contrary, a market with low liquidity often experiences wild price swings, which is indicative of high volatility. It is important to take note that even in usually very liquid markets, there are periods of low liquidity as well. This happens during holidays, or when the European and Asian trading sessions overlap.
Pros and Cons of Trading a Volatile Forex Market
Like most anything else in forex, trading a volatile market comes with its share of pros and cons. You need to weigh these carefully to find out if volatility trading is right for you.
Let’s start with the pros. Because of the frequent, and usually large, price movements, a volatile market presents a lot of opportunities for making large profits. If you enter and exit your positions at exactly the right times, you can end the trading day with big earnings. Also, it is often the case that the most volatile forex pairs also have high liquidity. That is, there is a higher trading volume, which ultimately leads to minimized slippage and better execution.
Now, let’s go to the cons. Sadly, with the higher profit potential also comes a higher risk of losses. The unexpected price changes can cause massive losses, especially if you do not have sufficient risk management strategies for trading. Highly volatile markets can also trigger emotional trading. The sudden and frequent price changes can set off greed or fear, which provokes the trader to make emotional decisions, which are never a good idea.
What Are the Most Volatile Forex Pairs to Trade?
The very nature of volatile forex markets makes it difficult to pinpoint exactly which ones are the most volatile forex pairs because the prices keep changing. However, given current situations, we have found that the following are the 10 most volatile forex pairs as of this writing.
- GBP/JPY (British pound/Japanese yen)
- GBP/NZD (British pound/New Zealand dollar)
- GBP/AUD (British pound/Australian dollar)
- GBP/CAD (British pound/Canadian dollar)
- USD/TRY (US dollar/Turkish lira)
- USD/ZAR (US dollar/South African rand)
- EUR/TRY (Euro/Turkish lira)
- EUR/ZAR (Euro/South African rand)
- AUD/JPY (Australian dollar/Japanese yen)
- NZD/JPY (New Zealand dollar/Japanese yen)
Take note that there are no major forex pairs in the list because majors are generally known for their low volatility. This is also the reason why long-term investors gravitate towards the majors. On the other hand, if you prefer short-term speculation like in day trading or scalping, then our list of the most volatile forex pairs might just give you huge profits.
Best Trading Strategies for Volatile Markets
Trading a highly volatile forex market can be tricky but if you do it well, you actually have the opportunity to reap great rewards. Here are some expert tips on how to make trades on the most volatile forex pairs today.
First of all, make sure you have adequate risk management measures in place. Use the stop-loss and take-profit features of your trading platform wisely in order to minimize losses and maximize gains.
Second, you should also learn to use technical indicators that can help you gauge market volatility. By knowing beforehand if a forex pair is about to turn volatile, you can make the right decisions to protect your positions.
Third, it is also a good idea to diversify your portfolio by trading more than one currency pair at a time. This can reduce your risk exposure and, if you choose your forex pairs well, also boost your profit potential.
Of course, these are just some ways to navigate the highly volatile forex market. Volatility has its good and bad side, so you have to weigh your options very carefully. There’s no secret formula and you basically just have to learn as you go. Choosing a reliable forex broker definitely helps, so you must also be meticulous in taking your pick.
