Trading the Most Volatile Forex Pairs​: Key Facts About Forex Volatility

Summary: Trading the Most Volatile Forex Pairs

Volatility in Forex refers to how much and how quickly currency prices change. While volatility creates opportunities for big gains, it also increases risk. Exotic and certain major currency pairs tend to be more volatile. Smart risk management and strategy are essential to avoid losses in high-volatility trading.

Key Points:

• Volatility Defined: Measures price fluctuation over time; influenced by liquidity and market activity.
• High vs. Low Liquidity: High liquidity often means lower volatility, while low liquidity leads to more price swings.
• Most Volatile Pairs: AUD/JPY, AUD/USD, and GBP/EUR are known for frequent and sharp price movements.
• Exotic Pairs: Often more volatile due to lower trading volume and geopolitical sensitivity.
• Trading Strategy: Volatility is neither good nor bad—profits depend on trader decisions and market timing.
• Prop Trading Option: Maven Trading allows skilled traders to limit personal risk with prop accounts.

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Volatility is a big part of the Forex market and a crucial factor influencing traders. The extent to which a specific Forex currency pair is volatile and the overall volatility of the market can both lead to major wins as well as serious losses.

So, what is volatility in Forex? And what are the most volatile Forex pairs? Keep reading to find the answers and become a more informed trader.

What is Volatility in Forex Trading?

When you hear someone talking about how volatile a Forex pair or the overall Forex market is, they’re talking about change. Specifically, how often changes in price happen over a given amount of time.

High Forex volatility can mean a currency pair skyrocketing in value or cratering compared to where it was just a few days (or even hours or minutes!) ago. Low Forex volatility means prices still change, and sometimes significantly, but those changes aren’t as extreme or as fast.

To give you a better grasp of volatility and how it influences the Forex market, here are a few key facts. Follow along, we promise it’ll all tie back to volatility.

The Forex market is open 24 hours a day, five days a week. In 2020, it was worth $2.4 quadrillion in total, Investopedia explains. Because the Forex market is so large and active, it’s generally considered to be very liquid.

In markets and trading, liquidity refers to the level of market activity. Lots of traders, trading, and movement? That’s a high-liquidity market.

A slower pace, fewer traders, and less movement? That’s a low-liquidity market.

We bring up liquidity because it’s closely tied to volatility. To put it another way, you need to be aware of liquidity to truly understand volatility.

The basic connection is simple. In the big picture, liquid markets are less volatile. Forex.com gives us a good explanation: High liquidity, with lots of traders and trading, tends to limit drastic changes in prices over time and bring down the Forex market’s volatility.

So, compared to certain other markets, the Forex market doesn’t have incredibly high volatility overall.

Of course, individual pairs can still have plenty of Forex currency volatility. When a major news event influences a minor or major currency pair, the price of that pair can quickly shift.

This is generally what day traders are looking for when applying their trading strategies. Specifically, short-term trading opportunities that offer the potential for big wins.

Additionally, the market itself will experience periods of overall increased volatility. At times when fewer traders are trading or when major news impacts multiple currency pairs, for example, volatility can increase.

Here’s one more key piece of context before we look at the most volatile Forex pairs: Volatility isn’t always a good thing or a bad thing. It all depends on the choices traders make and the volatility of pairs in trading. Remember, volatility can lead to both larger wins and more painful losses.

Consider a trader who thinks the Euro will drop in price relative to the US Dollar. They go short on EUR/USD, and their prediction pans out. They can buy back EUR/USD at a lower price and come out on top of that trade.

Now, consider the same scenario, but with the opposite choice. A trader thinks the Euro will rise in price compared to the US dollar and goes long on EUR/USD. The Euro’s value drops, and the trader either manually exits the trade or their stop-loss order goes into effect, leading to a loss.

Some of The Most Volatile Forex Pairs

Certain Forex pairs are considered to be especially volatile. At times, nearly any Forex pair can be volatile due to major news events, overall market sentiment, and other factors. However, some pairs are generally more volatile than others overall.

Remember, these volatile pairs aren’t always the best profitable Forex pairs. Forex traders will see major swings with the most volatile Forex pairs at times, but those swings can lead to either wins or losses depending on the trader’s choices.

Most exotic Forex currency pairs (pairs that include a major currency and a less common currency, often one from a growing or emerging country) have more volatility than major pairs. That’s in part because these exotic pairs have lower trading volume, and less liquidity means more volatility. Some of these countries are also more exposed to financial and geopolitical events that cause major swings in the value of their currency.

However, not all volatile pairs are also exotic pairs. Some currency pairs that encompass two countries with established and sound economies are volatile, too. Examples of these most volatile Forex pairs include:

AUD/JPY

The value of the Australian dollar is heavily tied to its exports, with significant changes based on recent news and economic performance. The Japanese Yen, meanwhile, is widely seen as a stable and safe currency.

Shifts in commodity prices, Chinese economic news (due to Australia’s close economic relationship with China) and more can cause major swings in the price of this pair.

AUD/USD

The AUD/USD pair is a popular trading option because it includes a very stable currency (the US Dollar). And because it has the potential for major volatility due to the nature of Australia’s economy. It’s similar to AUD/JPY in this regard.

GBP/EUR

The UK Pound and Euro pair has seen increased volatility since the UK exited the European Union. Despite the separation, the economies of these two entities are still closely connected. That means economic and political news in Europe has plenty of potential to shift the value of one currency, the other, or both, leading to major swings in price for Forex traders.

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