Volatility is a trader’s friend, allowing speculators to capitalize on movements. Without market volatility, it is impossible to make money. Traders love volatile FX pairs because they can make high returns. Higher profit potential is also linked with higher risks, but capitalizing on big price swings is possible with proper knowledge. Let’s dive deeper and list some of the most volatile currencies and the best methods to capitalize on their movements.

Currency volatility explained

In Forex, volatility is a degree of variation in the price of a currency pair over a specific period. High volatility means the price of a currency pair is changing fast and dramatically in a short period in either direction. Higher volatility can present significant opportunities for FX traders to jump in and make profits, but risks also increase. To manage and limit risks, traders need strict discipline and well-thought-out risk management strategies. Without proper education and beginners’ trading guide, making profits in highly volatile markets can be a very difficult task.  Here is the list of factors affecting the volatility most:

• Economic indicators — major macroeconomic news releases such as inflation rates, GDP growth, central bank interest rates, and employment rates.
• Geopolitical events — Political instability, wars, elections, and changes in government policies can cause investors to lose and gain confidence and cause volatility.
• Market sentiment — Traders’ perceptions and reactions to news and events can have a profound effect on market volatility. Fear and greed are major emotional factors.

The most volatile currencies in 2024 listed

In 2024, the exotic currencies are leading the charge as the most volatile instruments. Exotic pairs such as USD/SEK (US dollars vs. Swedish Króna), USD/TRY (dollar vs. Turkish Lira), and USD/BRL (dollar vs. Brazilian Real) are among the most volatile currencies. The main cause behind these high levels of volatility is exotic pairs’ inherent nature of low liquidity when compared to major and minor pairs. Lower liquidity makes exotic pairs more susceptible to significant price changes. Other volatile cross pairs include GBP/NZD (British Pound vs. New Zealand Dollar), GBP/AUD (Pound vs. Australian dollar), and GBP/JPY (Pound vs. Japanese Yen). These pairs have shown consistent volatility of moving on average for more than 100 pip daily, which is a significant volume for Forex instruments.

Case studies of volatile currencies

Major price movements in volatile currencies are often caused by economic or political events, for example:

• Turkey (USD/TRY) — Economic policies, inflation rates, and political instability have caused major fluctuations in the Turkish Lira.
• Sweden (USD/SEK) — Economic reports, interest rate decisions by the Swedish Central Bank, and global market trends made the Swedish Króna fluctuate significantly.
• Brazil (USD/BRL) — the Brazilian Real’s volatility has been impacted heavily by political changes, commodity price fluctuations, and economic reform.

As we can see, the main causes of volatility are political stability changes, policy changes on a government level, and central bank decisions that affect inflation directly.

Trading strategies for volatile currencies

Trading highly volatile currencies requires specific strategies that account for sudden price changes, and key considerations include technical analysis and risk management. Properly reading price charts and employing technical indicators to react to current price movements can be critical when speculating on highly volatile pairs. Tools like ATR (Average True Range) can help immensely to measure volatility, set appropriate stop losses, and take profit levels. Without proper stop-loss at a certain, safe distance from the current price, highly volatile pairs might easily take stops. Stop loss and take profit orders are risk management tools that allow traders to limit losses and target specific amounts of potential profits. Using stops is critical in trading, especially when dealing with highly volatile pairs. Implementing strategies to manage and mitigate losses can be achieved with stop loss, order diversification, and carefully selected leverage levels. Understanding these basic risk management strategies are the cornerstone of financial trading and beginners have to make it into their character to always use stop-loss orders.