The forex market is without question the largest market in the world in terms of average daily volume traded. The forex market trades an average daily volume that exceeds $5 Trillion per trading day. Volatility in the forex market is equally unmatched with respect to other markets. There are several factors that impact this attribute of the forex market. First, the forex market operates 24-hours per day. During the course of a 24-hour trading day, the forex market is impacted by the openings, and all the day’s financial events, news, and market movements of the three major markets, Tokyo, London, and New York. Second, although a significant amount of the enormous volume that is traded in the forex market is by traders solely for the purpose of generating profit, an even larger portion of the volume originates from international monetary transactions by businesses and government entities, both large and small. These transactions are what create and maintain the immense volume and create many volatile forex pairs.
Volatile Forex Pairs (Currency)
Within the forex market, all of the currency pairs tend to move and react in concert with each other. If there is any major news in any the countries of the major currencies (i.e. USD, GBP, EUR, CHF, JPY, CAD, AUD), all the currency pairs will react. For the major currencies, the pairs with the USD as the quoted currency (the second currency listed in the quote, i.e. GBPUSD, EURUSD) will move in tandem, while the pairs with the USD as the base currency (i.e. USDJPY) will move in the opposite direction. The range of the price movements for each of the currency pairs will vary depending on the prevailing strengths or weaknesses of each of the country’s underlying economic metrics. The major currencies will typically exhibit the most volatility when measured on each of their respective price scales. The major crosses (i.e. GBPJPY, EURGBP) also exhibit a high degree of volatility, however, the effect that arbitrage has with respect to the U.S. Dollar keeps their range in check.
When it comes to trading the forex market, having the highest measure of volatility does not necessarily make a currency pair the best pair to trade. If a currency pair is volatile for the wrong reasons, it is better not to trade it. For example, an exotic currency pair may be very volatile because it is very thinly traded, and the spreads are extremely wide and vary significantly when large trade orders are placed. It’s probably best to stay away from such a pair and stick to the very liquid markets.
Volatility vs. USD per Pip
The more important metric to consider is the USD per pip metric. This is the amount of U.S. Dollars per minimal price movement (pip). The three currency pairs that quote the USD as the quoted currency (GBPUSD, EURUSD, AUDUSD) all have a fixed USD per pip of $10 per contract. For all other currency pairs the USD per pip metric varies depending on the prevailing market price. Consequently, a currency pair with lower volatility, and a higher USD per pip metric may be better to trade than one with higher volatility, but a lower USD per pip metric. A comprehensive back-test of a trading strategy will determine which is optimal.