Forex Volatility - What Are The Most Volatile Currency Pairs?

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Want to start trading forex but not sure which currency pair to pick? Discover why volatility is the most important factor you should consider in our complete guide to the most volatile currency pairs.

As a forex trader, one of the most important decisions you’ll need to make is which currency pairs you want to trade. There’s no right or wrong answer — but the decision you make will influence everything from your trading strategy to your risk management.

One factor which you should always consider when choosing your currency pair is volatility. Although highly liquid markets such as the foreign exchange market (also known as forex or FX) usually have lower levels of volatility, there are many reasons why certain currency pairs are more volatile than others.

The volatility of your currency pair will affect almost every aspect of your forex experience. Trading more volatile currency pairs can mean bigger profits, but it can also mean bigger losses. As a result, you’ll need to balance the potential gains against the increased risks.

Ready to find out what the most volatile currency pairs are? In this article, we’ll guide you through the top 10 most volatile currency pairs and explain how volatility can shape the forex market.

What Are Forex Currency Pairs?
Forex is the biggest financial market in the world. According to the Bank of International Settlements, its average daily trading volume is around $5.2 trillion. This trading volume is generated by the exchange of currency pairs — the name given to a pair of currencies which are bought and sold simultaneously.

Each currency pair is made up of a base currency and a quote currency. The value of a currency pair is determined by how many units of the quote currency are equal to 1 unit of the base currency.

For example, let’s say you’ve decided to trade the world’s most popular currency pair: EUR/USD. In this situation, the base currency is EUR because it comes first in the pair. The quote currency is USD, because it comes second. You would need to know the price of both the base currency EUR (which is known as the bid price) and the quote currency USD (known as the ask price) in order to work out whether this pair is worth trading.

The difference between the bid and ask price is called the spread, and you can work this out by subtracting the bid price from the ask price. These prices are usually given to four decimal places because the variations in value can be incredibly small. This means that spreads are often very narrow. However, as FX traders usually trade such large amounts, even modest spreads can rapidly add up.

What Is Volatility?
Volatility is a word that’s used a lot in the world of trading. Before we take a closer look at the most volatile currency pairs in forex, it’s important to understand exactly what volatility means and how it can be measured.

Put simply, volatility in forex is the extent to which your currency pair fluctuates in value. Traders and investors use this information to predict breakouts and other investment opportunities. The most volatile currency pairs will have undergone a lot of price movements within a certain period. Less volatile currency pairs will have undergone smaller price movements.

In forex, price movements are often measured in pips. This stands for percentage in point (or price interest point) and is used to represent tiny shifts in value. In general, a pip can be thought of as the fourth decimal place in a spread — for example, $0.0001.

Factors which affect volatility include interest rate differentials and geopolitics. For commodity currencies such as AUD or NZD, the value of exports and imports will also affect volatility.

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