All pairs of national currencies are split into three categories based on their liquidity and other factors. The least common choice is the class of so-called FX exotics. These are traded most thinly, and they are rarely seen in international monetary transactions. This is explained by association with emerging and relatively unstable economies which are often only gaining strength.
Keynote: Exotic Trading Currencies
A currency that isn’t used much on the foreign exchange market is called a “exotic currency.” Exotic currencies are hard to buy and sell, don’t have a deep market, can be very volatile, and don’t trade very often. Trading an exotic currency can be expensive because the bid-ask spread is usually big to make up for the fact that the market isn’t very liquid.
Exotic Currency in Forex Trading
At first glance, the disadvantages of these combinations outweigh any pros. Here are the most obvious negative features of such combos as the Thai baht, the Iraqi dinar, or the Uruguay peso. Their limited circulation on the forex marketplace is perfectly logical if you consider the following:
- insufficient market depth,
- the higher cost of trading,
- extreme volatility,
- low trading volumes,
- restricted convertibility due to exchange controls.
Profitability is generally considered harder to obtain owing to the nature of spreads. The differences between the ‘bid’ and ‘ask’ prices, however, are normally broad enough to make up for the insufficient liquidity.
Do not expect to gain access to such pairs using a standard trader account. As they are closely tied to less reliable economies with modest trade relationships, they cannot compete with such giants as the USD or the GBP.
What Sways the Values
Any trader should be aware of the host of factors moving currency prices. For instance, the British pound has been clearly affected by all the Brexit controversies. From geopolitics to monetary policies of respective countries, there are both micro- and macroeconomic indicators at play.
The situation with exotics is very peculiar. Since they come from Asia, Africa, the Middle East, and the Pacific region, they are most affected by political changes. If the system of state governance is unstable, the currency is likely to collapse, rather than experience moderate drops. Fluctuations are often abrupt, which complicates market analysis.
At the same time, the fragility of such national economies causes the rates to be notably volatile. As the probability of negative changes in value is high, traders need more sizeable margins in their accounts.
For instance, consider the Russian Ruble. The value of this national currency is closely linked with global prices for crude oil. Whenever the price for the Brent barrel collapses, so does the Ruble. The stronger the demand for crude — the stronger the currency. Although it is affected by other factors as well, this correlation is the most salient.
List of Exotics
Here are a few exotics trading pairs which trade with the minor and major FX pairs.
U.S. DOLLAR Pairing with Exotics
USD/BRL U.S. DOLLAR/BRAZILIAN REAL
BRITISH POUND Pairing with Exotics
GBP/DKK BRITISH POUND/DANISH KRONE
EURO Pairing with Exotics
EUR/CZK EUR/CZECH KORUNA
CANADIAN DOLLAR Pairing with Exotics
CAD/HKD CANADIAN DOLLAR/HONG KONG DOLLAR
AUSTRALIAN DOLLAR Pairing with Exotics
AUD/HKD AUSTRALIAN DOLLAR/HONG KONG DOLLAR
NEW ZEALAND DOLLAR Pairing with Exotics
NZD/HKD NEW ZEALAND DOLLAR/HONG KONG DOLLAR
SWISS FRANC Pairing with Exotics
CHF/DKK SWISS FRANC/DANISH KRONE
Trading strategies for Exotic Currency Pairs
There are many different ways to trade forex, but there is no one strategy that is better than the others.
Depending on the market conditions, the currency you’re trading, your trading plan and style, and the timeframe, each strategy has its own time to shine.
Something that works well right now might not work as well in the future, so it’s always a good idea to reevaluate your trading goals and strategies.
The forex market is unique because it is always changing. This is what makes it the most traded financial market in the world.
Try to learn as many different trading strategies as you can, and focus on one currency until you know it well enough to move on to something new.
On the exotics market, forex traders have used a lot of different ways to trade. These styles can be grouped together based on how long the positions are held.
Some examples of trading styles are:
Day traders also use technical analysis, just like scalpers do, unless something unexpected happens in the world of politics.
Day traders trade positions within the day and don’t typically hold positions overnight.
To make a profit from their trades, which can sometimes end in a loss, they also need fast execution and low commissions.
Scalping is the most active way to trade because positions are only held for seconds or minutes at a time.
Technical analysis is the only part of the strategy because fundamentals can’t change things in such a short amount of time.
It’s very important to choose a foreign exchange (FX) broker with low fees and fast execution times, since you need to make a lot of small trades to make a lot of money.
This is the longest time frame trading style.
Most of the time, the jobs are held for months or even years.
Fundamental analysis is the main thing that drives Forex position trading, and it is very similar to traditional stock trading.
Here, the most important thing about your broker is that you can trust them and that they won’t go out of business for a long time.
The next step in the trading styles is swing trading.
Here, people stay in their jobs for a few days to a few weeks.
Both technical and fundamental analysis can be used in the analysis since both can affect the price in this time frame.
This is a good way to trade for FX traders who want to get into the forex market part-time because positions are only opened and closed occasionally.
Pros and cons of trading in exotic currency pairs
There are pros and cons to trading exotic pairs in forex, and many experienced traders can tell you that they have seen the market go up and down in this area. There are many good things about forex trading in general, and one of them is that you can trade a wide range of exotic currencies from all over the world.
Before you start trading exotic forex pairs, take a look at the following pros and cons:
Less market forces: They usually don’t have as much in common with other financial instruments like stocks and bonds. This means that macroeconomics may have less of an effect on them.
Volatility: Exotic pairs can be a lot more volatile than majors and minors. This can be bad, but it can also be good because it gives you a better chance of making money.
Less liquidity: If there isn’t a lot of money moving between an exotic currency pair, it will be harder for you to buy and sell at the price you want.
High spreads: To make up for the higher spreads, you might need more money to trade exotics.
Volatility: As was said above, increased volatility can be both good and bad, with high risk and the chance of losing more money.
Devaluation risk: The value of exotics can change a lot when governments make sudden changes to their policies. A developing country’s currency can lose value quickly when central banks or market events happen.
Understand the risks of Trading Exotics Pairs
Traders must understand the risks when deciding to deal with exotics. Due to the instability of the respective economies, the values are highly susceptible to political changes. Value rises and falls are often dramatic and abrupt.
Regulated Brokers for Trading Exotic Forex Pairs
Alexandra is a journalist and analyst with an extensive background in the financial markets. Alexandra started out in the financial industry in 2011 and trades forex, stocks, and cryptocurrencies.
Alexandra also writes technical and fundamental market analyses. Alexandra also tests forex brokers’ trading platforms and crypto exchanges and writes forex broker reviews.