Volatility refers to the amount of uncertainty or risk involved with the size of changes in a exchange rate. A higher volatility means that an exchange rate can potentially be spread out over a larger range of values. High volatility means that the price of the currency can change dramatically over a short time period in either direction.
On the other hand, a lower volatility would mean that an exchange rate does not fluctuate dramatically, but changes in value at a steady pace over a period of time.
Commonly, the higher the volatility, the riskier the trading of the currency pair is.
Technically, the term “Volatility” most frequently refers to the standard deviation of the change in value of a financial instrument over a specific time period. It is often used to quantify (describe in numbers) the risk of the currency pair over that time period.
Volatility is typically expressed in yearly terms, and it may either be an absolute number ($0.3000) or a fraction of the initial value (8.2%).
In general, volatility refers to the degree of unpredictable change over time of a certain currency pair exchange rate. It reflects the degree of risk faced by someone with exposure to that currency pair.
Volatility for market players
Volatility is often viewed as a negative in that it represents uncertainty and risk. However, higher volatility usually makes trading more attractive to the market players. The possibility for profiting in volatile markets is a major consideration for day traders, and is in contrast to the long term investors’ view of buy and hold.
Volatility does not imply direction. It just describes the level of fluctuations (moves) of an exchange rate. A currency pair that is more volatile is likely to increase or decrease in value more than one that is less volatile.
For example, a common “conservative” investment, like in savings account, has low volatility. It will not lose 30% in a year but neither will it profit 30%.
Volatility over time
Volatility of a currency pair changes over time. There are some periods when prices go up and down quickly (high volatility), while during other times they might not seem to move at all (low volatility).
