Tug Of War Sparks Volatile Trading In EURUSD

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This article explores the topic of Forex currency volatility as a whole, discussing what is volatility? What are the highest volatility currency pairs? how volatility affects trading in general, how to measure volatility with indicators such as the Average True Range (ATR), currency fluctuations, and more!

The uncertainty that sprung from the surprise result of the Brexit vote back in 2020 sent shockwaves through the global financial markets. Consequently, The summer of 2020 was a volatile time for the Forex market. The most notable moves were in Forex (FX) pairs containing sterling (GBP). The immediate aftershocks of the Brexit referendum have faded somewhat now (although currency pairs that include GBP are still affected greatly by news developments, and announcements regarding the Brexit negotiations).

There are many other factors that also affect the FX markets. Speculation on the timing of further FED (Federal Reserve Bank) rate hikes and long-term fears of economic weakness have grown more in more recent years, which has fuelled uncertainty. And more often than not – uncertainty is a close companion to volatility. But before we start, we need to be clear on what volatility is, how we will classify volatile currency pairs, and how to adjust volatility protection settings.

What is volatility?

When we discuss volatility, we are discussing how much a price moves over a certain period of time. In short, a more volatile market will move more frequently over a given time-frame, compared with a less volatile one. Now when we say that, we are talking about price movements, and that can be one of two things:

Both have their uses, namely: The proportionate measure is more useful for comparative purposes generally, and when we are specifically looking at currencies, it can be useful to talk in absolute terms.After all, traders may simply want to know typical pip movement for a certain period. And for the purposes of the following comparison, let’s use this route. We’ll simply look at how many pips each currency moves.

Measuring the Volatility Index & the Forex ATR Indicator

There are different ways to measure volatility, but one of the best-known indicators for this purpose is the Average True Range (ATR). The ATR indicator was developed by J. Welles Wilder (along with a collection of other well-known methods), in his book New concepts in technical trading. Wilder was a commodity trader and ATR was originally designed for commodity markets.

In the commodity market, there is normally a stretch of time between the market closing and reopening. It is not unusual to see commodity prices ‘gapping’ upon opening. Gapping refers to opening at a different level to the close of the previous day. This is less of an issue with the FX market, because currencies trade 24 hours a day during the week.

Nevertheless, it may be applicable when the FX market re-opens after closing for the weekend. A gapping market poses a problem to the most simplistic way of gauging volatility: which is looking at the range between the high and low for a certain period.

So what is the problem if the previous close was outside that range?

Well, if we focus purely on the high-low range, we are ignoring a certain amount of movement when the market gaps upon opening. True range is a measure that accounts for this circumstance, and is the largest of the following:

  • High of current period minus low of current period
  • High of current period minus close of previous period
  • Low of current period minus close of previous period.

Note that true range is always a positive value. We ignore the minus sign if we get a negative value from the calculations (see above). But why do we do this? Where volatility is concerned, we are only interested in the magnitude of change – not its direction. Once we have our values for true range, we use them to derive ATR.

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ATR is an Exponential Moving Average (EMA) of true range. The good news is: ATR comes as a standard indicator with MetaTrader 4. Traders may also benefit from using the MetaTrader 4 Supreme Edition plugin, which provides the ability to list highly volatile currency pairs, and also comes with several other handy indicators that complement ATR.

Highest volatility currency pairs

One way of measuring the volatility of a currency pair is to use the ATR trading indicator, or Average True Range. For example, here is a daily price chart of EUR/GBP, with the ATR (25) plotted beneath it:

Source: Admiral Markets MetaTrader 5, EURGBP, Daily – Data range: from Aug 08, 2020, to Nov 06, 2020, accessed on Nov 06, 2020, at 15:35 GMT. – Please note: Past performance is not a reliable indicator of future results.

This currency has gone through periods of high volatility and low volatility. During the high volatility periods – when the ATR indicator is at its highest – the average daily trading range of the past twenty-five daily bars was 89 pips. Whereas, during the low volatility periods – when the ATR indicators is at its lowest level – the average daily trading range of the past twenty-five days was just 41 pips.

Let’s compare it with the EUR/GBP currency pair:

Source: Admiral Markets MetaTrader 5, EURGBP, Daily – Data range: from Aug 08, 2020, to Nov 06, 2020, accessed on Nov 06, 2020, at 15:35 GMT. – Please note: Past performance is not a reliable indicator of future results.

During the first few months of 2020, the ATR reading was quite high, peaking at 152 pips. The lowest reading up until June 2020 has been 81 pips. Both are significantly higher than EUR/GBP.

So from the examples provided, it is clear to see that EUR/NZD moved a lot more than EUR/GBP during the specified timeframe. It’s important to note that volatility changes over time and what was once a high volatility market could turn into a low volatility market.

What’s So Important About Currency Volatility?

Like many technical measures, ATR is measures something that occurred in the past. It is performed in order to make an educated guess about what may be likely for the market in future. Such probabilistic thinking is usually at the heart of good trading.

It is advisable that traders:

  • Do not try to make specific predictions about the future
  • Attempt to gauge the overall probabilities of success for strategies in the long run

Naturally, you are probably now wondering if there is a way to forewarn yourself about likely times of higher volatility. Yes, there is. One tool that traders use, is the Forex Calendar. By watching how volatility rises when certain reports come out, traders can get a feel for what kind of data releases tend to be market movers. For example, the US Bureau of Labor Statistics usually releases employment data on the first Friday of each month.

The data is extremely timely and historically well correlated with economic growth. As a result, it has often sparked sharp movements for a variety of markets like FX. But that’s just part of the story: because there may be patterns of volatility throughout the trading week. You may want to study this yourself to see how volatility ebbs and flows. If so, why not read our guide on the best days per week to trade Forex? and learn more!

Other Ways Volatility Affects Trading

There’s varied ways that you can use volatility to guide your trading decisions. For example, you can use your volatility measure to try and normalise the level of risk you take with each trade. This involves adjusting your trading size, so that it’s appropriate in relation to the market’s volatility.

  • The more volatile a pair, the smaller your contract size
  • The less volatile a pair, the larger your contract size.

This move attempts to reduce the impact of volatility on your trading. But why would you want to do this?

Well, imagine you are using the same strategy across multiple FX pairs. It stands to reason that your chance of winning or losing, is the same for each position you have, right? After all, a winning strategy should provide you with overall profit over the long term.

Such a result, will generate a sequence of losing and winning trades. But here’s the thing: the balance of these results is everything. It’s vital that no losing trades dwarf your winning trades. This could happen if a loss occurs on a more volatile currency pair, when you haven’t adjusted your size accordingly. The usefulness of volatility doesn’t stop there – it can also help you to choose a market that best suits your trading style.

If you are a long-term trend follower, you are probably going to want to trade a less volatile currency. Why? Because volatile markets make it hard to hold on to a long-term trend. Whipsawing prices will ensure that there are times when at least some of your profit will evaporate.

And let’s face it, that can be hard on a trader’s psychology. On the other hand, if you are a swing trader then you probably want more volatile pairs. Let’s take a look at a quick example of increasing volatility. We mentioned Brexit earlier, because it was an example of extreme market volatility. Let’s consider trading over that period:

Source: Admiral Markets MetaTrader 5, GBPUSD, Weekly – Data range: from August 25, 2020, to Nov 06, 2020, accessed on Nov 06, 2020, at 15:35 GMT. – Please note: Past performance is not a reliable indicator of future results.

The image above shows a weekly chart of the GBP/USD currency pair, which includes the 14-period ATR plotted beneath it. You can see how volatile the FX pair was before, during and after the Brexit vote, as the ATR reached the highest levels in the time period shown. The long red candle in the middle is for 24 June 2020, when the market reacted to the outcome of the Brexit vote.

Now obviously such a sharp move pushed the ATR up to very high levels, and because the ATR is an average, this kept the ATR high for some time after. However, notice how the ATR was rising even before the Brexit vote? The volatility actually started rising a year earlier in 2020.

In January 2020 the weekly average range was above 200 pips. After the Brexit vote the range was above 480 pips.

A Final Word On Volatility

Any complete strategy will include rules for:

  • Which markets to trade
  • When to trade specific markets
  • Position sizing
  • Risk management

Knowledge of a market’s volatility can help to inform your decision on all of the four points above – so it’s important. As we discussed earlier in the article, measuring volatility is dependent on the time-frame you are focussing on. Which time-frame yields the most useful information will likely depend on what type of trader you are. You will be able to work out what works best for you through a process of trial and error, that’s best served via a Demo trading account. We hope that this discussion of the most volatile currency pairs will help you to add another dimension to your trading.

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Trading during volatile markets

It’s natural to feel anxious about your investments when the markets are volatile. See how you can weather the market swings.

POINTS TO KNOW

  • Trading volumes are high during volatile markets.
  • Volatile markets can delay executions of trades.
  • Don’t let emotions override the decisions you made for your long-term financial plans.

What to expect

Volatile markets are extreme and unpredictable. They’re characterized by:

  • High trading volumes.
  • The inability of market makers and specialists to quickly match buy and sell orders.
  • The imbalance of trade orders in one direction.

Under these conditions, stock prices can change quickly and dramatically. Real-time quotes can lag behind actual market movements.

Trading tips

When you’re placing trades in volatile markets, keep these points in mind:

Orders may be delayed

Your order may execute at a price significantly different from the quotes displayed when you entered your order.

Set prices to reduce risk

Placing a limit order allows you to set an upper or lower limit on the amount you’re willing to pay or accept for a stock. There’s no guarantee your order will execute.

Watch for systems slowdowns

Because of heavy trading volume in a particular security or the market overall, you may not be able to place an order electronically or you may have difficulty reaching an investment professional by phone.

Keep in mind …

It’s tempting to want to do something when markets are volatile. But that’s exactly when you shouldn’t act on emotion.

Take a step back and think about your long-term goals and asset allocation . Don’t let the day-to-day market noise send you off course.

If your reasons for investing haven’t changed and you have a diversified portfolio of stocks , bonds , and cash investments , doing nothing is usually best.

What are the most volatile currency pairs?

Volatile currency pairs can offer many opportunities for profit. Learn more about forex volatility, including the names of some of the most volatile currency pairs and how to take advantage of their price movements.

Volatile currency pairs: what you need to know

The most volatile currency pairs offer enticing prospects for profit because their price movements can be more dramatic than less volatile pairs. However, while increased volatility may offer more scope to realise a profit, it can also increase a trader’s exposure to risk.

Largely speaking, volatile pairs are affected by the same drivers as their less-volatile counterparts. These include interest rate differentials, geopolitics, the perceived economic strength of each currency’s issuing country, and the value of these nations’ imports and exports.

That being said, there are a few things to bear in mind before opening a position on a volatile currency pair. The main thing to remember is that volatile currency pairs often have lower levels of liquidity than their less-volatile counterparts because not every trader has the appetite for risk to take a position on a volatile market. However, with a well-thought-out trading plan and risk management strategy in place, there is little to fear from volatile currency pairs.

A definitive list of the most volatile currency pairs is hard to collate, chiefly because volatility can affect different currency pairs at different times. This is because of the previously-mentioned factors, which can cause the price of a currency pair to rise or fall. However, some currency pairs have had historically high volatility.

List of volatile forex pairs

AUD/JPY

The first volatile currency pair on our list is AUD/JPY, which represents a pairing of the Australian dollar against the Japanese yen. This pair enjoys high volatility thanks to the inverse relationship between the Australian dollar and Japanese yen.

The Australian dollar is a commodity currency, meaning that its price is heavily linked to the price and volume of Australia’s exports, particularly minerals, metals and – to a lesser extent – agricultural products. Conversely, the Japanese yen is widely considered to be a safe-haven currency, meaning that investors often turn to it in times of economic hardship – something which they do not do with the Australian dollar.

As a result, the price movements of this pair can be very dramatic depending on the current global economic outlook. The graph below demonstrates the volatility in the AUD/JPY pair since September 2020.

NZD/JPY

NZD/JPY is a pairing of the New Zealand dollar against the Japanese yen. Similar to the Australian dollar, the New Zealand dollar is a commodity currency and its value is closely tied to the price of New Zealand’s agricultural exports, which can make this pair particularly volatile.

Some of the top exports from New Zealand are dairy, eggs, meat, wood and honey. As a result, any changes in the price of any of these markets will affect NZD’s value against the Japanese yen.

GBP/EUR

GBP/EUR is a matching of the British pound against the euro and, following Brexit, this pair has seen constant volatility. This is particularly true around any key policy announcements, or any crucial votes in the House of Commons.

For example, the pound increased against the euro following the first defeat of Theresa May’s Brexit deal in the Commons by 230 votes in January 2020. This rise came after sterling fell almost 7% throughout 2020, which reflected uncertainty surrounding the terms of the UK’s departure from the EU. Volatility in this pair could decrease if a withdrawal agreement is agreed, but so far there has been no sign of consensus.

CAD/JPY

CAD/JPY pairs the Canadian dollar and the Japanese yen. The yen is seen as a safe haven, and the Canadian dollar is a commodity currency, with its value on the currency market heavily influenced by the price of oil on the commodity market.

Adding to this, Japan is a top importer of oil, which means that as the price of oil increases, the cost of buying Canadian dollars with yen also tends to increase. This is because as oil prices rise, more yen must be converted into CAD to buy a single barrel of oil, with this increase causing the price of CAD/JPY to rise.

For example, if there was an oil supply cut from other countries around the world, the price of Canadian oil exports would likely increase, which would cause the Canadian dollar to increase against the yen.

Because of oil’s reputation as one of the most volatile commodities in the world, traders who are interested in the CAD/JPY pair should keep an eye on the oil markets and any relevant news releases, as these are sure to impact the volatility of this pair.

GBP/AUD

The GBP/AUD pair is comprised of the British pound and the Australian dollar. Historically, these two currencies have been correlated, particularly since Australia is part of the Commonwealth of Nations. However, being a commodity currency – as previously mentioned – the price of AUD is heavily linked to the value of Australia’s exports.

A knock-on effect of the US’s trade war with China has been that Australian imports to the Chinese markets have fallen. Since China is one of Australia’s main trading partners, this does not bode well for Australian manufacturers and exporters, who rely on strong trade links with China to maximise their profits.

As a result, currency pairs which contain AUD have seen increased volatility since the start of the trade war. To make matters worse for the GBP/AUD pair, the pound has seen increased volatility since the Brexit referendum result in 2020. Speculators are waiting to see whether volatility in this pair will ease off after 31 October – the official deadline for the UK’s departure from the EU to be finalised.

USD/ZAR

USD/ZAR sets the US dollar against the South African rand. Volatility in this pair is greatly affected by the price of gold. This is because gold is one of South Africa’s main exports, and gold is priced in US dollars on the world market – which means that the price of gold is strongly correlated with the strength or weakness of USD.

As a result, if the price of gold is rising, the price of the dollar will likely also increase against ZAR. This is good for South African exporters because it means that they will get more US dollars for their gold on the world markets.

However, this will also make it more expensive to buy US dollars with South African rand. Because of this, traders who are interested in the USD/ZAR pair should carry out sufficient analysis on the price of gold and the factors which affect its price before opening a position.

USD/KRW

The USD/KRW pair is the US dollar against the South Korean won. The South Korean won, in its current form, was formed after the separation of the Korean peninsula into two separate parts following the Second World War.

Following the separation, the South allied with America and the North allied with Russia. As a result, the economic disparities of capitalism and communism started to become apparent and can still be seen on the peninsula today.

With that being said, the won currently trades at around 1000 to one against the US dollar. Because of this inflated exchange rate, price movements in the USD/KRW pair are common, and many traders look to this pair as a way to make a quick profit.

USD/BRL

The USD/BRL pair is the US dollar against the Brazilian real. This pair enjoys frequent price movements, creating opportunities for traders who focus on day trading or even scalping.

As an emerging market, Brazil is an exciting economy for those seeking to capitalise on the forecasted future development of the South American country. However, politics in Brazil has been unstable at times, with corruption dominating headlines in the last decade or so.

This was exacerbated by the election of Jair Bolsonaro – a far-right populist – to the presidency in January 2020. On 2 January 2020, a day after Bolsonaro was sworn in as president, the real dropped 2.63% against the dollar, followed by 1.08% the following day and 1.07% the day after that. These drops are circled in the below graph.

Adding to this, there has been an economic slowdown following a two-year recession that started in 2020 and caused the economy to contract by 7%. Bolsonaro himself has said that he knows little about economics, and so volatility is likely to remain in this pair throughout his premiership.

USD/TRY

USD/TRY encompasses the US dollar and the Turkish lira. TRY has been highly volatile since 2020 following a failed coup d’état and the subsequent ‘purges’ that have been taking place in Turkish society.

Turkish politics remains highly unstable, with many still supporting the Peace at Home Council – the group behind the failed coup. This instability was reflected in the fact that the lira fell following heavy losses to President Recep Tayyip Erdoğan’s AK Party in elections held throughout 2020.

The lira will likely remain volatile until the current political instability in Turkey is settled, but speculation remains over how long Erdoğan will remain in power and whether his successor – if there is to be one in the near future – will be any better for the value of the lira in the global forex markets.

Because of the uncertainty surrounding the current outlook for the lira, USD/TRY is a key pair to watch for any forex traders seeking a highly volatile pair on which they have the scope to realise a quick profit by going either long or short.

USD/MXN

The final pair on our list – USD/MXN – puts the US dollar against the Mexican peso. Tensions between these two countries have risen ever since US President Donald Trump won the 2020 presidential election. More recently, a series of tariffs have been implemented on Mexican exports to the US, as well as a series of threats against Mexican immigrants trying to get into the US via its southern border.

The current tariff rate of 20% has already caused volatility in this pair to increase, with announcements surrounding the immigration policies of the Trump administration tending to have an adverse effect on the peso.

With the 2020 US election approaching, it is likely that this pair will remain volatile as Trump turns to his flagship immigration policies in order to energise his base for his re-election campaign.

What are the least volatile currency pairs?

The least volatile currency pairs are generally the majors. They are the currency pairs which have historically been the most popular among traders. These pairs include EUR/USD, USD/JPY, GBP/USD and USD/CHF.

Aside from these four ‘traditional majors’, most lists of major currency pairs will also mention a few commodity currencies such as AUD/USD, USD/CAD and NZD/USD; as well as some cross currencies including EUR/GBP, EUR/CHF and EUR/JPY.

How to trade forex volatility

Two of the most popular ways to trade forex volatility – or volatility in general – is by opening a CFD or spread betting account. CFDs and spread bets are financial derivatives, meaning that they afford you the ability to go long to bet on the market rising, as well as short to speculate on it falling.

There are five simple steps that will help you get started trading forex volatility:

  1. Research which forex pair you want to trade
  2. Carry out analysis on that forex pair, both technical and fundamental
  3. Choose a forex trading strategy and check you’re comfortable with your exposure to risk
  4. Create an account and deposit funds
  5. Open, monitor and close your first position

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