Do you want to know what the most volatile Forex pairs are?
Surely, because you’ve probably heard that volatility is very important in the markets and it is always better to look for the most volatile assets.
Surely if we operate the most volatile assets we will have more chances of making money than operating others that do not move.
It is not the same to trade in General Electric as in Bitcoin, it is clear.
In the Forex, the same thing happens.
There are some pairs more volatile than others and, therefore, many people say that these are the best pairs to negotiate.
Well, do not go so fast because that may not be the case.
In this sense we must take into account other things no less important than volatility, especially if you want to trade. Let’s not say whether you want to do day trading, scalping or any other aggressive technique.
I am quite surprised that in many places volatility is associated with the number of pips or points that an asset moves, when in reality that is a not an appropriate term.
For example, in a 2013 Dukascopy blog post we were told that the least volatile Forex pairs were the EURGBP, EURCHF and the NZDUSD.
This way of measuring volatility, in pips, is not suitable for a market in which the assets have very different prices from each other, which causes us to end up measuring pears with apples.
To say that the NZDUSD is one of the least volatile pairs of the Forex is not true, because in reality, it is one of the most volatile pairs, if we measure it in percentage terms.
For example, according to the data of the last 50 weeks, in the great investing.com volatility calculation tool, we can see that the NZDUSD has a daily volatility of 96%.
You can compare it with 75% of the USDJPY, 70% of the EURUSD and 79% of the GBPUSD.
Yes, the GBPUSD may move 106 pips a day and the NZD only 66, but in the end it turns out that the most “broad” movements are given by the last one.
Therefore, it is wrong to calculate the volatility of Forex pairs in terms of pips.
Volatility of Forex measured in pips or percentage?
It is better for us to study this volatility in percentage terms, so that we can equalize the different assets through the same measurement standard.
Other pairs that are highly volatile according to this Investing data are:
- AUDJPY: 96%
- AUDUSD: 95%
- CADJPY: 94%
- GBPJPY: 95%
- GBPNZD: 96%
- NZDJPY: 98%
- USDMXN: 105%
- USDTRY: 107%
- USDZAR: 141%
This is something I have already talked about in particular posts such as the Turkish lira, the Mexican peso, the rand, the yen or the pound.
These volatilities are well above those of the classic pairs, such as:
- EURUSD: 70%
- GBPUSD: 79%
- USDJPY: 75%
- USDCHF: 72%
- USDCAD: 74%
Now, as I said before, this does not mean that trading pairs with more volatility is the best idea, because in the end we find that pairs with “low volatility” are as good to operate as many of those who have “high volatility”.
The main enemy of volatility, as far as trading is concerned, is the spread, as always, which is nothing other than that great “hidden” cost that we have to face in trading.
The spread: as important or more than the volatility in the Forex
For example, we are going to see the spreads of one of the brokers that I use, IC Markets, which tend to be the lowest in the market and is a broker that likes scalpers and Expert Advisors, as well as those who like to negotiate aggressively.
However, keep in mind that these spreads may change at any time and that I am only setting them as an example at the current time.
- EURUSD: 0.1
- USDJPY: 0.3
- AUDUSD: 0.3
- GBPUSD: 0.5
- USDCAD: 0.6
- USDCHF: 0.4
- AUDJPY: 0.6
- EURJPY: 0.6
- GBPJPY: 0.9
- NZDUSD: 0.7
- NZDJPY: 0.9
- USDTRY: 33
As we can see, the best spreads are, as expected in the classic pairs, such as the EURUSD and the USDJPY.
In this case we have to take into account that we are also paying commissions, of about 7 dollars per round lot, which is another cost that we tend to add to the operation.
This would be equivalent to paying 0.7 extra pips.
With these data, we can see more or less which pairs are more or less interesting to make aggressive trading more efficiently.
We will see this data next to the current prices of each pair, to get an idea of the trading efficiency ratio offered by some of these pairs.
|Cost (spread plus commission)||Volatility in pips||Ratio Volatility/Cost|
With these data we can see that we have some pairs that offer us more cost efficiency when negotiating Forex.
Interestingly, and at least in the broker mentioned, the EURUSD is the most efficient pair.
Then we would have the GBPJPY and the EURJPY, with 91 and 90 of spread cost relative to volatility, hence the fact that many times “we hear” that the GBPJPY is one of the best pairs to do forex trading is not by chance.
Other interesting pairs are, obviously, the GBPUSD and the USDJPY, with 88 and 84 respectively.
The next pair, the USDCHF, would already have 64, so with these conditions we can see how the rest of the pairs get a little more expensive when negotiating in the traded broker taking into account the daily movements and the spreads and commissions that we have to endure.
Therefore, in this case we could say that the best trading pairs would come to be the EURUSD, GBPJPY, EURJPY, GBPUSD and USDJPY.
This does not mean that those are the best pairs that we could choose to negotiate, but that they are the most efficient pairs from a cost point of view in this broker.
This will change, obviously in each broker so I recommend that you do a small study of the volatility of the pairs in your broker with respect to the cost of trading that would include the spread and the commission.
With this you will have an idea of which are usually the best pairs to negotiate, with which you will end up paying less commissions, a very important aspect in trading, without a doubt.
Therefore, in the end, the best thing is always to choose a series of pairs that have little correlation and that have enough liquidity, and the best thing in this case, especially for traders with little experience, is to keep the typical USD pairs and at best, some of the other crosses of the most important pairs.
The list would look something like this: EURUSD, USDJPY, GBPUSD, AUDUSD, NZDUSD, EURJPY, GBPJPY and perhaps CADJPY, to include the Canadian dollar.
Why do not I include USDCAD or USDCHF?
The first because it is a pair that does not have much volatility and is very problematic.
The second because it is a very correlated pair with the EURUSD and would be negotiating almost the same, and for that we simply negotiate the EURUSD.
Finally, as you can see, we would have many correlated pairs, such as GBPUSD, GBPJPY and USDJPY, so we would have enough “duplicate” trades, probably. So the best thing in this case, as usual, is to choose the most typical pairs, such as the EURUSD, GBPUSD, AUDUSD and USDJPY, which present the best conditions in terms of volatility, cost and liquidity. However I prefer to operate the GBPJPY than the GBPUSD.
Volatility of Forex or any market with the ATR (Average True Range)
Returning a bit to the issue of volatility, an easy way to check what is the volatility of each of the pairs is to go directly to our platform and add the ATR (Average True Range), with which you can get an idea of the Volatility in the temporality that you prefer.
Once taking into account the volatility data of a given pair, you look at its spread and commission (if they have one) in the broker you use and you can get an idea of whether it is a “cheap” or more “expensive” pair to negotiate in that broker; something crucial in the systems that have to do many operations.
For example, in the EURUSD, if we use a 250-day ATR, we can see how the volatility of the pair varies with the years, and in particular it has dropped a lot since the crisis years, from 2007 to 2012, being lately hovering around 90 and 110 pips, with an average of about 100 pips of daily volatility in the last 5 years.
If we go to the time, we can see that in the last month it has been around 15 pips.
That of the GBPJPY, for example, has a range of about 28 pips in the last month, substantially higher than that of the EURUSD, which explains why this pair is quite good for trading despite having a cost per spread substantially greater than Euro-American couple.
Interestingly, and despite the popularity of the cryptocurrency market, we can verify that it is much less efficient to trade than the Forex market.
For example, Bitcoin has a daily volatility of about 600 dollars lately, but in many CFD brokers we will find a spread of about 80 or 100. If we calculate this cost with respect to volatility, we would get a ratio between 6 and 7.5 , which is very expensive if we compare it with Forex trading.
Some cryptocurrency exchange brokers, such as Kraken, offer us a spread that, although for a good part of the time, it goes to 10 dollars very easily.
With this spread, we would have a more acceptable trading cost opportunity, with a 60 ratio, similar to that of many Forex pairs.
However, the cryptocurrency trading in these brokers is more complicated because the functionality is not the same, in addition to the fact that there is no leverage, although this is not something that we lack in the Bitcoin market, with such extreme daily volatility and such a long-term trend. However, for trading I prefer the Forex.
As you can well see, this issue of volatility is very important in the Forex world and therefore of all trading, whether of stocks or horse bets.
We have to keep in mind that volatility will always be changing in all assets, and Forex is no exception, with large movements when there are crises in certain areas.
For example, with the case of Brexit we were able to witness significant increases in the volatility in the peers of the pound, which was a good opportunity to negotiate.
When there is a recession in other countries such as Japan, or a crisis of some kind, we can witness strong movements in the pairs related to it.
The same applies to the euro, the dollar or any other currency.
Therefore, it is always interesting to have a group of pairs that contain all the important currencies, in such a way that we will always have more possibilities of large increases in volatility and, therefore, to obtain good benefits.
If we manage a “portfolio” of pairs with the pound, yen, dollar, euro and Australian dollar, for example, it is more likely that we will have some of these currencies moving strongly, either by monetary policies in any of those countries, or anything else, such as a strong change in the price of gold, which usually affects the pairs of the NZD and the AUD.
Original article: https://www.buentrading.com/los-pares-mas-volatiles-en-forex/