FX Volatility – Part 1

Tuesday, Mar 6, 2012


Very much like people, foreign exchange (forex or FX) pairs have unique behaviors and traits that can be observed and studied over time.  This may help us to better understand the nature of their price movements.  For instance, volatility in a forex pair, captured by using the standard deviation of price movements in percentage terms, expresses the uniqueness of each pair while revealing the general heartbeat of the FX market.  While shared patterns become apparent, each pair’s volatility shows distinct characteristics that can be utilized by forex traders.  Analyzing these findings may not only broaden your knowledge of the forex market, but also improve your trading methodologies.  

Chart 1: EURUSD 15 min with the different trading sessions


 Although the forex market is open 24 hours a day from Sunday evening through Friday evening (U.S. time), the activity in a given pair is not consistent throughout the day.  To better understand the intraday structure of the price activity, it is important to note that the forex market is commonly divided into four major daily trading sessions: the Sydney session (4:00 p.m.–1:00 a.m. ET*, or 16:00–1:00 ET*), the Tokyo session (6:00 p.m.–3:00 a.m. ET*, or 18:00–3:00 ET*), the London session (3:00 a.m.–12:00 p.m. ET, or 3:00–12:00 ET), and the New York session (8:00 a.m.–5:00 p.m. ET, or 8:00–17:00 ET).  However, due to the almost complete overlap of the Sydney and Tokyo sessions, it is usually the Tokyo, London, and New York sessions (referred to as the Asian, European, and U.S. sessions) that are the focal points of trading activity.

*Note: winter times.

Volatility Ranking

Before diving deeper into each pair’s unique volatility profile, let’s consider how the different pairs rank against each other within each session in order to create a frame of reference.  As a reminder, a simple definition of volatility is the amount of price variation relative to time.  Since the paper will focus on price movements in percentage terms, not the price movements valued in a given currency, regular standard deviations will be used instead of other possible methods such as geometric standard deviations (GSD).  The rankings in Tables 1-3 below show the pairs ranked from most to least volatile during the Asian, European, and U.S. sessions.  Volatility calculations are made using open to close ranges. 

Table 1: U.S. Session (8:0017:00 ET) 5 Years of Data

Forex Pair

Volatility Ranking

Standard Deviation (%)

Pips (2 Std. Dev. * Close)

NZDJPY 1 0.9473 120
AUDJPY 2 0.9465 163
AUDUSD 3 0.7159 148
NZDUSD 4 0.6962 106
GBPJPY 5 0.6550 174
EURJPY 6 0.6086 143
USDCAD 7 0.5976 116
EURAUD 8 0.5560 152
USDCHF 9 0.5293 97
CHFJPY 10 0.5227 95
USDJPY 11 0.5182 86
EURUSD 12 0.4968 141
GBPUSD 13 0.4842 155
GBPCHF 14 0.4641 137
EURGBP 15 0.3609 64
EURCHF 16 0.3133 82

Table 2: Asian Session (18:00–3:00 ET) 5 Years of Data

Forex Pair

Volatility Ranking

Standard Deviation (%)

Pips (2 Std. Dev. * Close)

NZDJPY 1 1.1658 147
AUDJPY 2 1.1227 192
EURJPY 3 0.8667 203
GBPJPY 4 0.8472 226
USDJPY 5 0.7631 126
CHFJPY 6 0.6517 118
NZDUSD 7 0.5718 87
AUDUSD 8 0.4746 98
EURCHF 9 0.3944 102
EURAUD 10 0.3605 99
GBPCHF 11 0.3491 103
EURUSD 12 0.2770 78
USDCHF 13 0.2701 50
USDCAD 14 0.2164 42
GBPUSD 15 0.1899 61
EURGBP 16 0.1796 32

Table 3: European Session (3:00–2:00 ET) 5 Years of Data

Forex Pair

Volatility Ranking

Standard Deviation (%)

Pips (2 Std. Dev. * Close)

NZDJPY 1 0.9566 121
AUDJPY 2 0.9147 157
GBPJPY 3 0.7726 205
NZDUSD 4 0.7027 107
AUDUSD 5 0.6897 143
EURJPY 6 0.6719 158
USDCAD 7 0.6061 118
GBPCHF 8 0.6034 177
CHFJPY 9 0.5978 108
GBPUSD 10 0.5825 187
USDCHF 11 0.5761 106
EURAUD 12 0.5591 153
EURUSD 13 0.5473 155
USDJPY 14 0.5292 88
EURGBP 15 0.5133 91
EURCHF 16 0.3596 93

The ranking would be different if pip values in a given currency (e.g., U.S. dollar) were considered, since 1 pip in dollars would be different for the EURGBP versus that for the NZDUSD at any given time.  Additional content on this topic will be shared in the upcoming “Analysis Concepts: Behind the Scenes” webinar.  For now, let’s assume that trade sizes are adjusted to account for the different pip values to keep the standard deviation values on a level playing field.  The “Pips” column in the tables converts the values in the “Standard Deviation” column into expected typical open close ranges for the different sessions.  (These tables refer to standard pips, not fractional pips.  As a reminder, 1 standard pip is the fourth digit to the right of the decimal point for most currency pairs and equals 10 fractional pips on most trading platforms.) 

Several interesting observations can be made from the different tables.  While the volatility fluctuates significantly at times, each forex pair has a tendency to remain in roughly the same position across the different trading sessions, with a few exceptions such as the EURCHF.  On average, the European session is the most volatile, followed by the U.S. session.  The Asian session is the least volatile overall, while having the highest individual volatilities (NZDJPY and AUDJPY).  It’s important to recognize that the London session is the largest FX market.

The “Pips” amount is displayed to provide an idea of what type of movement can be expected during each session.  This amount can be greater for a forex pair ranked lower than another pair due to the different price levels and the way the calculations are being performed.  For example, in the table above, the NZDJPY ranks above the AUDJPY, but the pips amount for AUDJPY is greater than that for the NZDJPY.  This is mainly due to the fact that the overall price level of AUDJPY was higher than that of NZDJPY at the end of the study, not because the AUDJPY is more volatile than the NZDJPY.   

To an FX trader, the information in the different tables can be very useful in choosing which pair to trade depending on one’s particular disposition.  For example, someone seeking a lower amount of volatility may want to stay away from the Asian pairs in favor of a European cross-currency.  Please note, however, that lower volatility in the forex market can relate to high volatility in other asset classes, mainly due to the high leverage.

Now that we have an overall view of these forex pairs, what can be expected within each trading session?  Are different times within each session more volatile than others?  Are there volatility patterns across the different pairs?  Can some pairs be grouped together due to their historical volatilities?  To answer these questions, let’s consider a 24-hour volatility map for all these different pairs.   

24-Hour Volatility Map

The first graphic leverages the power of TradeStation with Excel to display all forex pairs’ volatility (standard deviations of hourly ranges highs to lows) during an average 24-hour period over a five-year period (Figure 1 below).  The map refers to U.S. Eastern time and the three different sessions (Asian, European, and U.S.) are marked using differently colored backgrounds. 

Figure 1 – 24-Hour FX Volatility

While the overall heartbeat of the FX market is readily visible, the distinctiveness of each pair is just as noticeable.  This provides forex traders with a sketch of when volatility rises and falls as the global business day progresses.  The overlap between the European and U.S. sessions provides the greatest volatilities across the board, mainly due to high liquidity and to large investors converting their European assets to U.S. dollar assets in anticipation of the opening of the U.S. market.  In the FX market, liquidity means volatility. 

The following graphs show that particular forex pairs can be grouped together since their 24-hour volatility maps are very much comparable (Figures 2-4 below).  The first group includes forex pairs where an Asian currency is both the base and quote currency (Asian cross-currencies).  The second group includes forex pairs where a European currency is both the base and quote currency (European cross-currencies).  The last group includes the “Big 4” from the major currencies.  After analyzing the Asian crosses, you may start to wonder if there’s any benefit in trading both the AUDJPY and the NZDJPY.  Also, when looking at the European crosses, if you trade the GBPCHF but are becoming uncomfortable with the volatility, you may want to consider the EURCHF instead.  On the other hand, if you are based in the U.S. and looking for a major with some added volatility to trade before going to bed, the USDJPY may be for you.  In addition, if you employ breakout strategies, you may want to stay away when volatility is silent.  At the same time, if you prefer using support and resistance levels instead, periods of lower-than-average volatility may be worth focusing on.   

Figure 2 – Asian Crosses 24-Hour FX Volatility

Figure 3 – European Crosses 24-Hour FX Volatility

Figure 4 – Big 4 FX Pairs 24-Hour Volatility


For a forex day trader, it is vital that a particular currency pair has enough movement (volatility) to allow the trader to capture intraday price swings.  Adequate liquidity is also needed to avoid excessive slippage.  Trading may be made more efficient by targeting the time of day that most consistently provides the needed amount of volatility and liquidity.  Of course, these criteria need to be balanced with your unique profile, which may encompass a wide array of factors including risk tolerance, trading methodologies, experience, current financial situation, and geographic position.  Over time, the successful FX trader will achieve a proper and personal balance of these elements, making FX trading disciplined, productive, and fulfilling.      

Part 2 (coming soon) will introduce a custom indicator for forex pairs that utilizes historical volatility to further assist FX traders.

Forex trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose.

Posted By: 

Frederic Palmliden

Frederic Palmliden, CMT, is a senior quantitative analyst for TradeStation.  He currently works on custom strategy and indicator design and is a contributor to the monthly TradeStation Labs - Analysis Concepts, a publication providing thought-provoking ideas and discussion of markets and trading.