Currency rate volatility, which is often calculated by measuring the standard deviation or variance of currency price movements, informs traders about how much a currency may change compared to its average over a certain time period. Traders may also assess volatility by examining the average actual range of a currency pair or the range expressed as a percentage of spot.
The greater the degree of risk, the greater the amount of currency rate volatility, and vice versa. The phrases volatility and risk are sometimes used interchangeably. On average, various currency pairings have varied amounts of volatility. Some traders prefer trading volatile currency pairings because of the larger potential gains. When trading extremely volatile currency pairings, traders should consider limiting their position sizes since the increased potential gain comes with a higher risk.
The following are the most volatile major currency pairs:
As a consequence, other key currency rate pairings such as are less volatile and more liquid. Emerging market currency pairings have some of the greatest volatility levels.
The largest currency pairings, which are also the most liquid, have the least volatile currency pairs. Furthermore, their economies are bigger and more developed. This generates increased trading volume and, as a result, improves price stability. Given the enormous levels of liquidity that EUR/USD, USD/CHF, and EUR/GBP trade with, it's no wonder that they're among the most volatile currency pairings.
The average true range for USD/CHF is between 45 and 65 pips, which is a modest average true range when compared to other pairings. The average true range of a currency is one of several measures to assess a currency pair's volatility. Another common technical indicator for measuring volatility is Bollinger Band width.
The volatility of two currencies may be affected by their correlation. The lower the volatility, the more favorably two currencies are connected with one another. Continuing our USD/CHF comparison, both the Swiss Franc and US Dollar are considered safe-haven currencies.
When the market suffers bouts of risk aversion, the Swiss Franc and US Dollar tend to increase versus their sentiment-linked counterparts, although the two currencies may not diverge significantly from each other. This adds to the USD/CHF volatility estimates being quite low.
When forex online trading, forex traders should consider current volatility levels as well as prospective changes in volatility. Market players should also think about how volatile a currency pair is when altering their position sizes. When trading a volatile currency rate pair, a smaller position size may be required.
Volatility awareness may also aid traders in determining proper stop loss and take profit limit orders. It's also critical to understand the key factors that separate the most volatile currencies from those with low volatility ratings. Traders should also know how to assess volatility and be aware of situations that might result in big volatility variations.