In our last article we covered market hours & schedules, not lets talk about volatility in binary options trading.
What is Volatility?
In currency trading, volatility refers to the range of changes in value of a currency pair within a certain amount of time. When the range is high, a currency pair is deemed to have more volatility, while a currency pair is deemed to have low volatility when the range is low.
There is no widely accepted level above and below which a currency pair is thought to have high or low volatility (although the EUR/USD pair is used as a benchmark, since it occupies a central position between the highest and shortest ranges). Usually, volatility of currency pairs is used as a relative measure to compare currency pairs, than a definite measure.
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How does Volatility affect Trading in Binary Options?
Amongst the long list of assets traded in Binary Options, currency pairs are a popular bunch. Consequently, the volatility of a trade pair and its average pip value influences what strategy a trader uses. Therefore, while some traders may yearn for volatility, others may shy away from it.
What makes Volatility Desirable in Binary Options?
Binary Options is also referred to as Single-payment options trading because of the nature of trading positions taken. Clearly, with a volatile pair, a trader can take high-value positions without falling out-of-the-money, thereby making huge gains. With increasing volatility, the positions can be higher and more positions can be taken.
It is important to exercise caution. As is the case with leverage, high volatility can lead to quick monumental losses if the market goes against your position.
What are the Most Volatile Currency Pairs?
The volatility of currency pairs is not static. Because the average daily trading range (in Pips) of currency pairs are measured annually, the relative position of currency pairs in an organized chart fluctuates.
Therefore, it is best to describe the most volatile currency pairs in terms of how often they appear high up in the chart, than at what level they appear in a specific annual duration.
With this in mind, the three most volatile currency pairs, in no specific order, are:
The other two currency pairs making the five most volatile currency pairs list are GBP/CHF and EUR/JPY.
For comparison, the three least volatile currency pairs are NZD/USD, EUR/GBP, and EUR/CHF.