As Forex traders, forex volatility is dependent on the time it takes for a currency pair to move from a certain price to the other. A knowledge of the volatility of the pairs you trade is crucial to your success as a trader.
We say a currency pair is highly volatile if it has the ability to move over a great amount of pips within a short period. Currency pair volatility increases risk when trading.
Join My Telegram Channel To Never Miss An Update
OR
Let’s Get Interactive On Facebook.
You might still be struggling as a Forex trader because of the currency pairs or even the assets you trade. When I started trading, I had the idea that the more the pairs I traded, the more the profit I booked. In the trader’s world, that newbie idea would be interpreted as; more pairs, more risk and a high rate of failure.
Before I delve into the topic of forex volatility and liquidity, let us first get to know the types of currencies that are existent in the Forex market. There are major pairs (not to be confused with the 8 major currencies), minor pairs and exotics.
Currency Crosses.
Currency pairs that do not include the USD are minor currency pairs or crosses. Taking into consideration the 8 major currencies with the exception of the USD, the rest of them (EUR, GBP, JPY, CHF, AUD, NZD and CAD), when paired are known as minor pairs. Examples of crosses are NZDJPY, EURAUD, GBPCHF, CHFJPY and so on.
The USD is the world’s most important currency followed by EUR, JPY and GBP in descending order. This brings us to the majors of the minor pairs. Out of those emanates EUR crosses, GBP crosses and JPY crosses. EUR crosses are those that have euro in its quotation. GBP crosses are those that have GBP in its quotation…in that manner. Got it?
The exotic pairs are the least traded on the forex market, as opposed to the majors. Exotics are the currencies of countries with emerging economies. For instance, MXN (Mexican Peso), ZAR (South African Rand) and SGD (Singaporean Dollar) are all exotics. Though they pair with the USD, they are not major pairs. USDMXN, USDSGD, USDZAR, USDNGN are all exotic pairs.
Midway volatile currency pairs.
The less popularity a currency pair has, the more volatile it gets. High volatility causes unpredictability in price. This means you are likely to be wrong than right.
The CHF is one of the less predictable currencies in this business of uncertainties. Going beyond the EUR and GBP crosses to trade commodity pairs like NZDCAD, AUDCAD, CADCHF, AUDNZD and a whole lot of unpopular currency pairs tends to get tougher for the newbie.
Commodity currencies paired together or pairs that have something key in common tend to have some fair amount of volatility. A major example of a pair that has a key thing in common is the CHFJPY. CHF and JPY as individual currencies act as safe havens.
Safe haven currencies are basically currencies that are expected to rise in value in times of global economic uncertainties.
Such pairs tend to be choppy most of the time, but make no mistake, when they begin to trend, they give some of the most amazing “free falls or easy rises” (run away markets). The choppy aspect aside, the spread of a pair becomes more and more expensive with the level of unpopularity.
You’re better off not trading any of the exotic currency pairs. They are monstrously volatile. If monster spreads, unexpected forex volatility and low liquidity does not bother you; you can trade those.
Slippage is an issue here as well. If you buy or sell an exotic currency pair, you may not get filled at your desired price.
Due to the small volumes and the minute liquidity on exotics, technical analysis (esp. with price action) is the hardest. Also, since most of them were not available to trade on the market many years ago; it is likely that your broker doesn’t have chart data dating back till then.
That is something which is really crucial when hunting for support and resistance levels. Take a careful look at the shots below.
I am trading all still I’m not profitable. This January 2019 made it a year in trading forex for me, and I am 21yrs old. Please what advice would you give me. I am trading and learning price action
Hi Uzoma, send me a mail from the contact page and let’s see what you can do right with your trading.
Hi I have been trading simulated account only for one year and a half. Haven’t funded my account because in simulated account i have only swapped money not making or losing. Recently I have been studying and using price action instead of indicators. Have been doing better with direction but impatience and stop loss setting has been my mistakes. I appreciate your teaching it is very useful. Thanks.
You’re welcome Davie, I appreciate the fact that you’ve been able to find something useful here. Cheers!
Pingback: Forex entry orders; which one is the most favored? - WeDeyTrade
Pingback: The US Dollar Index & currency correlation; a cheat sheet. - WeDeyTrade
Pingback: When to trade and when not to trade. - WeDeyTrade
Pingback: What is a stop loss order; how do you set it right? - WeDeyTrade Stop Loss
Pingback: Bollinger bands; a technical indicator you can do without. - WeDeyTrade