The Most Volatile Currency Pairs And How To Trade Them

USDZAR Daily Price Chart

WHAT ABOUT THE LEAST VOLATILE CURRENCY PAIRS?

The least volatile currency pairs tend to be the major currency pairs which are also the most liquid. Also, these economies tend to be larger and more developed. This attracts more trading volume and facilitates greater price stability in turn. To that end, considering EUR/USD, USD/CHF and EUR/GBP trade with high volumes of liquidity, it comes as little surprise they are among the lease volatile currency pairs.

Illustrated below, the average true range (ATR) on USD/CHF ranges between 45-pips and 65-pips, a low average true range compared to other pairs. The average true range of a currency is one of the many ways to measure the volatility of a currency pair. Bollinger Band width is another popular technical indicator used to measure volatility.

USDCHF Daily Price Chart

Correlation between two currencies can also have an impact on their volatility. The more positively two currencies are correlated to one another might lead to less volatility. Continuing with our USD/CHF example, we note that the US Dollar and Swiss Franc are both viewed as safe-haven currencies.

The US Dollar and Swiss Franc tend to strengthen against their sentiment-linked peers when the market experiences episodes of risk aversion, but the two currencies may not deviate much from each other. This contributes to relatively low volatility readings for USD/CHF.

HOW TO TRADE CURRENCY PAIR VOLATILITY

Forex traders should take into account current readings of volatility and potential changes in volatility when trading. Market participants should also consider adjusting their position sizes with respect to how volatile a currency pair is. Trading a volatile currency pair might warrant a reduced position size.

Awareness of volatility can also help traders determine appropriate levels for stop loss and take profit limit orders. Furthermore, it is important to understand the key characteristics separating the most volatile currencies from currencies with low volatility readings. Traders should also know how to measure volatility and have an awareness of events that might create big changes in volatility.

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Disclosure: DailyFX hosts daily webinars to answer questions and help traders prepare for volatile market conditions. ...

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