Money is the oldest form of technology, states Konstantin Rabin of Finance Makers.
It has made saving, measuring, and exchanging goods easier. Unstable currencies can be a real challenge for any economy.
When it comes to volatility, it’s worth mentioning that in January 2015, the Swiss national bank removed its currency peg of 1.20 to the Euro causing one of the biggest moves in the 21st century. The move shocked traders. Some made fortunes, while others lost everything.
Sharp price moves can have various triggers. Understanding the sources of volatility and market reactions can drastically improve your results.
Let’s take a detailed look at the most volatile currency pairs, talk about the risks, spreads, and how to pick the best ones for your watchlist.
Things You Should Know About the Most Volatile Currency Pairs
- Strong economies are characterized by less volatility and stable currencies.
- Highly volatile currency is bad for the economy as it makes calculations difficult for businesses and creates unstable, risky environments.
- Highly volatile currencies have higher spreads due to less liquidity.
- Volatility increases during economic and political news.
- Highly volatile pairs carry high risks for novice traders.
Volatile Currency Pairs
In general, exotic currency pairs make the most volatile moves. Examples of exotic currency pairs are USD/ZAR (South African Rand), USD/MXN (Mexican Peso), EUR/TRY (Turkish Lira), etc.
Major currencies such as USD, EUR, JPY, GBP, AUD, CHF, etc. are less volatile due to the fact that they are backed by strong economies. Strong economies are characterized by stability, a steady stream of income, a diverse economy, and high liquidity. All of which contribute to low volatility.
The most volatile exotic currency pairs are USD/SEK, USD/TRY, USD/BRL, etc. The most volatile major currency pairs are GBP/USD, USD/CAD, etc. What’s more, you can find volatile cross-currency pairs. For instance: GBP/NZD, GBP/AUD, GBP/CAD, EUR/NZD, etc.
High liquidity is essential for traders’ success. A highly liquid market simply means that there are lots of buyers and sellers and you can trade your assets very quickly. In highly liquid markets prices are the most efficient as the spreads are tight and volume is large. What’s more, liquidity helps decrease the chances of price slippage. One more reason why exotic currency pairs are volatile is that they lack liquidity. Market orders and limit orders create prices on the chart. And when there’s not enough participation, the distance between limited orders increases, causing prices to make sharp jumps.
Major currency pairs and some cross-currency pairs offer the highest liquidity. In order to save fees on spreads, it’s recommended to only trade highly liquid assets. It’s important to keep in mind that volatile currencies are risky. They can increase your winnings but they can increase your losses too.
The British Pound is a highly liquid, yet highly volatile currency. When trading such currencies, it’s important to take into account volume. An increase in volume usually happens at breakout points and they usually predict upcoming sharp moves.
Types of Traders That See Volatility from a Different Perspective
Long-term investors see volatility as noise in the markets. Swing traders and long-term investors are looking at a bigger picture and are generally using large time frames to predict the future.
As for day traders, scalpers, and high-frequency traders, high volatility is essential as it brings more trading opportunities. Several new trading strategies are developed to take advantage of increased volatility during the announcement. Central bank decisions, inflation, and employment numbers cause short-time sharp fluctuations in price.
Keep in mind that some indicators like stochastic oscillators produce false signals in high volatility markets. It should not be a surprise that indicators that use average price as bases perform poorly when markets make crazy, sharp moves.
More Details About Volatility
Volatile currencies are a headache for governments. They create unstable environments. Make calculations difficult for businesses. Create risky conditions and weaken the economy overall. Central banks are created to control inflation by providing stable currency. When inflation increases too much, central banks decrease the supply of money by increasing interest rates. Limiting the money supply puts further pressure on the economy. Inflation has the potential to cause a recession or stagflation. In short, economic hardships can make certain currencies incredibly volatile.
Businesses like to make five-year, ten-year, and 15-year plans. Economies that can offer stable currencies, rule of law, and business opportunities, win the hearts of investors.
Super volatile currency is a super bad currency for everyday use.
Now let’s take a look at cryptocurrencies. For instance: some believe that Bitcoin is the future of money, while others disagree. One of the main reasons Bitcoin fails to be taken as a real currency is its unstable nature. How can you buy a cabbage from your grocery store when the money you’re holding changes buying power every hour? High volatility offers huge risks. On the other hand, it offers huge rewards too. For this very reason, highly volatile assets attract short-time speculators, which increases risks even more.
What Did We Learn from This Volatile Currencies Article?
We’ve learned that volatility increases risks and rewards. In order to limit risks, it’s better to trade highly liquid pairs that include major currency pairs such as GBP, CAD, AUD, NZD, etc.
High liquidity helps decrease spreads.
Some indicators such as Stochastic oscillators perform poorly in highly volatile markets. And volume indicators can predict an increase in volatility.
Unstable currencies can damage the economy by creating risky, unpredictable environments. Central banks try to control inflation by affecting the money supply. Economic news increases volatility in the markets and creates short-term trading opportunities for speculators.
Learn more about Konstantin Rabin here.