Every forex trader knows that profits in the foreign currency exchange market are made by buying at low price then selling at high price or selling at high price then buying at low price.

Therefore, the profits come from the fluctuation in currency prices. These price fluctuations result in currency price volatility.

Definition of Volatility

Volatility simply refers to the size of changes in a currency’s exchange rate and the level of risk or uncertainty caused by these changes.

A high volatility represents an exchange rate that can be spread over a wide range of currency values.

It means that the currency’s value can shift over a wide range of values dramatically within a very short time period in either direction.

In contrast, a low volatility means that the currency exchange rate does not experience wide shifts in short time periods.

Instead, the currency values change at a steady rate and within a prolonged period of time, most likely in one direction.

How Volatility Is Expressed

In technical terms, price volatility can be described as the standard deviation of change in the value of a currency over a particular time period.

In the forex market, volatility is typically expressed in annual terms as a fraction or as an absolute number in relation to the initial value.

For example, it can be expressed as $0.2408 or 7.8%.

Effect of Currency Price Volatility

Market players view volatility as the extent to which an unpredictable change in the value of a particular currency pair exchange rate occurs over a certain time period.

It is typically viewed as a negative aspect of trade due to the fact that it represents unpredictability, risk, and uncertainty.

However, it is also the reason why market players view the forex market as highly profitable since the higher the volatility, the higher the chances of very quick huge profits.

For instance, the currency major pairs are the most traded in the forex market due to their high volatility.

Due to their sudden, frequent, and wide increase and decrease in value, these currency pairs provide opportunities for very high profit levels using relatively low investment and over very short periods of time.

Currency Price Volatility over Time

Every currency pair experiences different volatility levels at different times.

Typically, most currencies experience high volatility during their country of origin’s election periods, during budget readings, when economic data is released, and when major news events occur.

They also experience very high short term volatility when financial markets are just about to close or immediately when they open.

In the same sense, when these factors are absent most currency exchange rates remain stable and experience very low volatility levels.