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The Most Volatile Currency Pairs and How to Trade Them Effectively

Author: Christophe Williams
Christophe Williams
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Volatile currency pairs can be a great way to make money in forex. However, they are also very difficult to trade because of their volatility. These currency pairs often have huge or dramatic price movements that allow traders to make a significant profit but they may also magnify losses.


In most cases, volatile currency pairs will also be impacted by similar factors as non-volatile pairs. Such common factors affecting these currency pairs include the value of imports & exports, interest rates, and geopolitical news among other factors. The major difference is that these currency pairs offer less liquidity to traders as many people fear the risks that they pose. 


Trading a volatile currency pair may prove difficult, especially to new forex traders due to the high risk and low liquidity that they pose. That said, having a well-thought-out trading strategy and risk management plan can make you trade these pairs with ease. This article explains what exactly makes a currency pair volatile and how you can use this knowledge to your advantage when choosing the currency pair you want to trade.

What is a volatile currency pair?

A volatile currency pair is one whose value moves up and down more than usual. Currency pairs that have high liquidity will often have a lower level of volatility. But how do you explain this? Well, if a currency pair has high demand or even supply then it will be much more difficult for its price to shift. This will then lead to lower levels of volatility.


On the other hand, currency pairs with low supply and low demand will see dramatic shifts in prices when a trader buys a significant amount of the pair. Currency pairs that are less traded often show these characteristics while popular currency pairs such as USD/JPY are less volatile.

Another probable reason for high volatility is major economic news or announcements that cause a shift in the forex markets. Traders are always on the watch out for major economic news that helps them know whether to buy or sell a currency pair. It is, however, worth noting that even major currency pairs can easily be swayed by these announcements. 

Should you trade a high-volatility currency pair?

High-volatility currency pairs have a high risk-reward ratio. They are also the most volatile ones and that means that there is a lot of price action in these pairs, which makes them exciting to trade. On top of that, they tend to move more than other currencies because they can be very volatile and unpredictable.


To trade these types of assets successfully, you will need experience with trading them as well as an understanding of how they behave under different economic conditions and market conditions such as volatility or liquidity (or lack thereof).


It is tempting to think that it is better to trade more volatile currency pairs since they offer larger price movements than their less volatile counterparts. A payoff from a profitable trade is much more likely to be larger when trading a more volatile pair than a stable pair. And while this may seem true, there are some risks that you will face since there is less demand and hence even lesser liquidity. 



How To Measure Volatility in The Financial Markets


Volatility is measured by how much it changes over a certain period, usually one month or less. For example, if you were trading currencies with EUR/USD (euros), then your volatility index would be very high because the value of each unit of the currency fluctuates wildly.

The most common measure of volatility is called VIX (VIX Index), which measures how much investors expect stocks to fall during periods of rising interest rates—and therefore increase their risk appetite for riskier investments such as futures contracts or options on stocks or indexes like Dow Jones Industrial Average DJIA-30).

The VIX Index is also a measure of expected volatility in the U.S. stock market. It is also sometimes called the "fear index" because it tends to rise when there are worries about the economy or panic selling in the market. The VIX Index is based on S&P 500 options prices, which can be used as a proxy for investor sentiment and expectations of future volatility in the market. 

The VIX Index itself measures implied volatility over 30 days using the bid/ask quotes for at-the-money options on S&P 500 stocks. This data is then recombined into one value representing current market expectations for near-term stock price fluctuations, based on the historical variation.

Exploring the Most Volatile Currency Pairs In the Forex Market


The volatility of currency pairs is often not something that is set in stone as any currency pair can become volatile depending on other factors. However, some currency pairs are historically known to be more volatile than others. Here is a look at some of the most volatile currency pairs in the forex market.


All About AUD/JPY


The Australian dollar (AUD) and Japanese yen (JPY) are some of the most popular currencies used by investors to hedge against risk or speculate on price movements. This pair can move either up or down dramatically depending on the news about Australia’s economy and interest rates set by central banks around the globe. But why is this the case?


One of the main reasons why AUD/JPY is the opposite relationship between Japan’s and Australia’s economies. Australia is largely a commodity currency whose economy is pegged on the value of its exports of mostly minerals and precious metals. On the other hand, Japan has mostly considered a haven currency pair that has maintained almost zero interest for a couple of decades. 


Most investors resort to the Japanese Yen during times of inflation, which is rarely the case with the AUD. The price shifts with this currency pair can then be quite volatile depending on the health of the global economy. 


All About NZD/JPY


The NZD/JPY is also one of the most volatile currency pairs in the world. This currency pair involves the pairing of the New Zealand Dollar and the Japanese Yen. It has a relatively low daily trading volume, which makes it attractive to traders looking to hedge their cash or those that want higher profits on trades.


One of the main reasons that explain the high volatility is that the New Zealand Dollar is also pegged to an agricultural economy. Any change in the market price of agricultural products such as milk, eggs, or meat will likely affect the country’s economy. Consequently, a change in the economy of the two countries can lead to shifts in the currency pairs. 

All About AUD/USD


The AUD/USD currency pair is also among the most volatile currency pairs. It has a daily trading volume of 1 billion units and a high-risk, high-reward ratio. If you’re looking to trade this pair, then you should be aware that it can sometimes be extremely risky due to its high volatility and fluctuation in price. However, if you're looking to make money from this pair with minimal risk and maximum gain potential then there is no better way than through day trading AUD/USD (AUD).


All About CAD/JPY


CAD/JPY is also a volatile currency pair that you can trade. The currency pair consists of the Canadian dollar versus the Japanese yen. It's also known as C$JPY or CADJPY on some exchanges, and there are several variations of this term you can use based on your trading strategy.

In this case, the Japanese Yen is still one of the most stable currencies in the world. However, the Canadian dollar is pegged on a commodity economy that is largely impacted by the price of global oil. 


It is, however, worth noting that Japan heavily imports oil and the value of the CAD increases when the value of oil increases globally. Japan will have to convert their Yen to Canadian dollars, which has the impact of increasing the value of CAD/JPY.


All About GBP/AUD


With this currency pair, the British pound is paired with the Australian dollar. The GBP/AUD pair has mostly been correlated over the years due to both of these countries being in the Commonwealth. However, the Australian dollar, as previously mentioned, is pegged to its commodity and export market.


One of the main factors that affect the fluctuation of the value of this currency pair is the exports and imports of the two countries. For example, the trade war between the United States and China caused the dwindling of Australian imports. Many manufacturers and even exporters from the country rely on cheap Chinese products to maximize profits. In such cases when the value of exports declines, the consequent value of the AUD declines. 


All About USD/TRY

TRY is the denomination for the Turkish lira, which means that the USD/TRY includes the US dollar and the Turkish Lira. The Lira has been quite volatile for a couple of years since 2016 due to the unsuccessful coup d’etat in the country and the consequent challenges that this event brought to the economy. 

Turkey is still haunted by its unstable politics as many citizens still empathize with the Peace at Home Council, which was responsible for the failed coup. Essentially, the Lira has been in a free fall since President Erdogan's subsequent election into power. 

One of the main reasons why the USD/TRY will remain volatile is due to the political challenges that the Lira faces. At the moment, the Lira is expected to remain unstable depending on how long the president will remain in power. The incoming president should also make reforms to the economy so that the Lira stops being volatile. 

Tips on How to Trade Volatile Currency Pairs in Forex

Trading volatile currency pairs is not the same as trading other popular pairs such as the GBP/USD. You need to come up with a new trading strategy that will not only consider the liquidity of the pairs you are trading but also the risk that you may incur. Here are a couple of trading tips that you can use when trading volatile currency pairs.  


  • Use a stop loss to limit losses- One of the main reasons for using a stop loss is to avoid making much more losses than you would otherwise incur. Many traders do not like the idea of using stop losses as they think they can go back to making profits even when they are on the verge of making losses. But a stop loss will prevent you from losing all your capital.
  • Use a trailing stop to lock in profits- A trailing stop is ultimately different from the take-profit order that most traders use to lock in profits. With a trailing stop, the take profit continues moving forward if the market goes up and is favorable until the market starts declining. Once the market starts declining, the stop loss order is raised to the trailing stop prices and the order is completed.
  • Set your maximum daily risk- Another simple way to trade volatile currency pairs is by setting your maximum daily risk by using the following formula:


 (1 + 10% of the current price) x 100 / stop loss percentage = maximum daily long position risk/maximum daily short position risk. 


For example, if you are trying to buy at $10 per share and have set your target as $12 per share, then you should set your trailing stop loss so that if it reaches 12 but not 13 or 13 but not 14 before closing on Friday evening after the market has closed for Friday trading session then you'd automatically exit all positions except for those held overnight with no further input required from either party involved; i.e., this is known as auto-exit functionality within most forex brokers who offer these types of services today including Fidelity Investments which runs online platforms like Personal Capital where users can manage their portfolios at no cost whatsoever.

What to consider before trading volatile currency pairs in forex?

Before you start trading volatile currency pairs, there are a few things to consider.

  1. The risk-reward ratio. You need to decide how much risk you're willing to take on and how much reward you'll get from the trade. If it's too high, then don't do it. You'll be better off investing in safer instruments like stocks or bonds instead of trading currencies that tend to move rapidly and unpredictably over periods of days or weeks at best or even months.
  2. The time horizon. Volatile currency pairs can be used as short-term trading opportunities when combined with other strategies. These include trend following (trading only in one direction) and breakout trading (which attempts to identify where prices will break out). This allows traders with smaller account sizes who want quick profits without taking too many risks during uncertain times while still having enough capital left over after each successful trade so they can make more trades later down the road if needed.
  3. The liquidity of the currency pair. Liquidity refers to how easy it is to get into or out of a position quickly without affecting the price. If you're trading with a small account, it may be better to trade less liquid currencies where prices don’t move as much when large amounts of money enter or exit the market (this is called a lack of correlation).

Final Thoughts: Most Volatile Currency Pairs in Forex Trading

Trading volatile currency pairs are not as same as trading other popular currency pairs such as the USD/JPY. The list of the most volatile currency pairs is long, but if you're looking for a way to make money from volatile currency pairs, then you should put some things into consideration. The first thing you need to do is find the currencies that are likely to be the most volatile in the coming days. You can do this by looking at historical data or by using indicators that have been proven effective in predicting changes in prices. Once you've found your first pair, it's time to set up a trading strategy. You should use an approach that takes into account both short-term and long-term trends when choosing how much risk you want to take on with this pair. If any patterns are emerging from previous market movements that suggest that one of these currencies will be more volatile than usual over the next few days, then it may be worth taking more risk than usual with this pair so that you can profit from these movements once they occur.

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.