As a forex trader it’s important you pick the right trading instrument(s) that suit your personality, and have adequate volatility to provide trading opportunities for you in the market. While it may be tempting to trade exotic pairs, or trade a lot of different forex pairs, the best approach is to pick 1 or 2 instruments max so you’re not spread to thinly. In this article we’re going to cover some of our favourite and most volatile trading pairs and indices.

The Importance of Volatility

Volatility, in the context of Forex trading, refers to the degree of variation of a trading price series over time. In simpler terms, it’s how much a currency pair’s price fluctuates within a specific period. High volatility offers traders more significant opportunities for profit, albeit at the risk of substantial losses. Low volatility instruments on the other hand tend to provide less opportunities to trade because price just doesn’t move enough to cover things like spreads and commissions.

The volatility of forex pairs are influenced by various factors such as economic events like monetary policy and interest rates, geo-political events, and more. Traders usually prefer volatile pairs because they offer more opportunities to enter and exit trades at profitable margins. Also, prices of a forex pair can move without news just based on pure volatility. Typically they like to move during the major sessions of the day (London and New York Session).

Top 5 Most Volatile Forex Pairs

EUR/USD (Euro/US Dollar

Known as the “Fiber,” this pair is the most traded in the world, representing the Euro against the US Dollar. This is also the pair with the most trading volume of all the forex pairs by a long shot.

Factors Affecting its Volatility: The European Central Bank’s monetary policy, economic indicators from both the EU and the US, and political events can be significant volatility triggers. 

Given its high liquidity, traders often use a mix of technical and fundamental analysis, but that shouldn’t discourage you from scalping it or employing a supply and demand strategy like the Phantom Trading strategy.

GBP/USD (British Pound/US Dollar)

Often called “Cable,” this pair represents the British Pound against the US Dollar. It is one of the oldest traded pairs and offers significant liquidity.

Factors Affecting its Volatility: Brexit talks (in the past), interest rates decisions from the Bank of England or the Federal Reserve, and employment statistics are some of the key drivers.

Due to its volatility, short-term trading methods like scalping and swing trading are often employed.

AUD/USD (Australian Dollar/US Dollar)

This pair represents the Australian Dollar against the US Dollar and is a significant pair that captures the dynamics of the Asia-Pacific region.

Factors Affecting its Volatility: Commodity prices, especially gold and other metals, have a significant impact. Additionally, economic indicators from both Australia and the U.S., such as employment figures and interest rates, can cause volatility.

Due to the pair’s sensitivity to commodity prices, traders often keep an eye on commodity markets in addition to using technical analysis tools. Employing stop-loss orders and other risk management strategies is advised due to the pair’s moderate to high volatility.

USD/JPY (US Dollar/Japanese Yen)

The USD/JPY is one of the most traded currency pairs and represents the exchange rate between the U.S. dollar and the Japanese yen. It’s a major pair that captures the financial relationship between two of the world’s largest economies.

Factors Affecting its Volatility: Because Japan is a major exporter, economic indicators related to its export economy can significantly impact this pair. Additionally, risk sentiment in global markets often leads to fluctuations in USD/JPY, as the yen is considered a “safe-haven” currency. U.S. economic data, such as Non-Farm Payrolls and changes in the Federal Reserve’s stance, can also drive volatility.

Traders often use a mix of technical and fundamental analysis when trading USD/JPY. Given the yen’s role as a safe-haven currency, understanding global market sentiment is helpful. Leveraging risk management tools like stop-loss orders is especially crucial due to the pair’s potential for sudden swings.

S&P 500/NAS100/US30 (Major U.S. Indices)

Description: These major U.S. indices provide a snapshot of the American economy by tracking the performance of top companies. The S&P 500 includes 500 large-cap stocks, the NASDAQ 100 focuses on technology companies, and the Dow Jones Industrial Average (US30) tracks 30 blue-chip stocks.

Factors Affecting their Volatility: Earnings reports, economic indicators like unemployment rates and GDP growth, and Federal Reserve decisions can all heavily influence these indices. Market sentiment and global economic conditions also play significant roles in their price movements.

Due to the comprehensive nature of these indices, they often require a broad understanding of the market. Most traders typically use technical indicators like Moving Averages and RSI in conjunction with fundamental analysis, but at Phantom we opt for trading using supply and demand and a naked price action chart as we’re able to read things like liquidity, manipulation, and market structure with it.

These indices are not forex pairs but are often traded on forex platforms. They offer a way to diversify strategies and can serve as indicators for broader market sentiment, which may impact forex trading decisions.

How to Trade Volatile Forex Pairs

Risk Management

Understanding your own risk tolerance is the first step in crafting a sustainable trading strategy. Techniques like setting stop-loss orders can act as a safety net, preventing catastrophic losses and helping to preserve your trading capital. This is especially crucial when trading highly volatile pairs, where prices can swing drastically in a short period of time.

Fundamental and Technical Analysis

Keeping an eye on economic calendars and news events can help you anticipate significant movements in forex pairs. News events such as policy changes, economic indicators, or geopolitical tensions can influence currency value heavily in a very short period of time, and most prop firms actually prevent you from trading them with the trading rules they have in place.

Leverage / Margin Requirements

High volatility pairs can offer high rewards but come with increased risks, particularly if you’re using leverage. Leverage amplifies both gains and losses, making it vital to understand the margin requirements set by your broker. A conservative approach to leverage can protect you from potential setbacks, especially when trading volatile forex pairs.

Entry and Exit Strategy

When it comes to volatile pairs, planning your entry and exit points is indispensable. Use technical analysis to identify potential breakout or breakdown levels and set your entry points accordingly. Given the volatile nature of these pairs, constant monitoring is often required to identify the optimal exit points. Automated trading tools like trailing stop-loss orders can also be effective for securing gains or limiting losses.

In Conclusion

Understanding the volatility of Forex pairs is crucial for any trader looking to make significant profits. While volatile pairs offer more opportunities for quick gains, they also come with higher risks. Therefore, mastering how to trade these pairs effectively is key to a successful Forex trading career.

By focusing on the most volatile Forex pairs, you open yourself up to more trading opportunities that can be capitalized upon. However, this also necessitates a strong understanding of risk management and the ability to react swiftly to market changes.

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Robert Castillo
FX Trader & Analyst
Writer & Editor

Rob is a funded trader from Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading, he enjoys making music, boxing, and riding motorcycles.