In the world of forex, it’s not only the most highly liquid exotic currency pairs that get traded. Other niche opportunities exist, albeit unconventional for some, to achieve potentially higher returns. And that’s through the trading of exotic currencies.
Unlike the name implies, these are not currencies from some beautiful, far flung island or land. Instead, exotic currencies typically belong to developing or emerging market countries, and are not widely used in global financial transactions. Think countries like Mexico, South Africa, Brazil, Hungary, Chile or Turkey. There are of course many more.
Exotic currency pairs are the forex market’s 3rd most traded pairs, with each pairing comprised of one exotic currency with one of 8 of the major currencies.
Some examples of exotic currency pairs include:
- USD/MXN
- USD/TRL
- USD/ZAR
- USD/BRL
- GBP/ZAR
- EUR/TRY
- AUD/MXN
- EUR/HUF
- EUR/PLN
Convertible vs non-convertible
Exotic currencies can be both convertible and non-convertible. Non-convertible means that it is nearly impossible for that currency to be converted into another legal tender. Examples include the Chilean peso, the Argentine peso, and the Brazilian real. On the other hand, the Mexican peso is an example of an exotic currency that is convertible.
The convertibility of a currency often correlates with the state of its country’s economy and government constraints. Limited global trade opportunities frequently link poor currency convertibility to slower economic growth.
The majors and the minors
Major currency pairs are those than always include the United States Dollar (USD). Market participants typically trade them more frequently in the forex market. Although there are 8 major currencies that exist globally, there are only 7 major currency pairs which are: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD.
The majors are typically display the highest levels of liquidity globally. In the trading context, this indicates that traders frequently trade these pairs in the financial market. Interestingly, the USD participates in more than 80% of all foreign exchange trading.
A minor currency pair on the other hand does not contain the USD. Also known as crosses, these pairs are usually slightly less liquid than the majors, and may also have slightly wider spreads. Some examples include: EUR/CHF, GBP/JPY, EUR/GBP, CHF/JPY, EUR/AUD, and NZD/JPY.
Characteristics of exotic currencies
Exotic currencies are quite distinct from major currencies for several reasons:
- Trading them isn’t easy in the forex market.
- They usually lack the volume of liquidity seen with major currencies. As a result, exotic currencies are usually subject to higher volatility and wider bid-ask spread.
- They lack market depth, with a significantly smaller number of market participants.
- They’re often subject to partial or total exchange rate controls, rendering them inconvertible.
- Market participants consider them more expensive.
- Exotic currencies are usually riskier .
But it’s not all doom and gloom
That’s right. There are in fact some valid justifications for traders opting to trade exotic currencies.
For one, trading exotic currencies offers traders untapped exposure to different economies “where more established financial instruments may not be available yet, allowing them to gain early exposure before markets mature further down the line”. [Medium].
Two, exotic pairs are typically more volatile than major or minor currencies. However, while this is usually considered a negative thing, volatility may also bring with it increased potential for higher returns. Risk management here is however KEY. And three, exotics can be used as an alternative option to hedging, that fit within governmental regulations.
Key approaches to trading exotic currency pairs
To achieve some measure of success trading exotic currency pairs requires a particular set of actions.
Studying global markets
Exotic currencies are sensitive to the political health of the countries to which they belong. In fact, during periods of political upheaval or instability, chances are that an exotic currency will depreciate rapidly. Furthermore, exotic currencies are also impacted by the state of a country’s economy, hence their volatile nature.
This means traders must stay actively involved in monitoring global economic developments and geopolitical events. This needs diligent research and keeping informed of news updates and economic indicators.
Conducting technical analysis
A trader seeking to trade exotic currencies has to implement some form of technical analysis to identify advantageous entry and exit points for trades.
Technical analysis is a crucial component of any trading strategy, particularly one that includes exotic currency pairs. Some of the more popular indicators used during this form of analysis are moving averages, Bollinger Bands, and Relative Strength index.
Implementing risk management techniques
If you consider the level of risk correlated with trading exotic currencies, making use of strategic risk management techniques is vital. This includes exercising caution in regards to position sizing, and setting up stop-loss or take-profit orders, to protect your capital.
Ways to trade exotic currency pairs
There are several different methods a trader can use to trade exotic currency pairs. While budget and skill largely dictate what method the trader will opt for, other factors do exist. The amount of time a trader has to dedicate to trading activities is one such factor. Trading knowledge and aversion to risk are others.
However, for the most part, traders will usually engage in either scalping, swing trading, day trading, or position trading. Other noteworthy trading strategies used by exotic currency pair traders are news trading and breakout trading.
Becoming a skilled exotic currency pair trader
If you’re undecided about how to trade exotic currency pairs, consider signing up for a demo account with T4Trade. This account will give you access to the MetaTrader 4 (MT4) platform on which you can practice a variety of different approaches to trading. Take your pick of strategy or style, implement it on the platform, and then assess outcomes.
The demo trading account provides you with a simulated trading environment, for you to get a real feel for market conditions. It also provides you with virtual funds in order to execute forex trades using exotic currency pairs.
This eliminates the fear of putting your own money at risk, and gives you the headspace to learn how to properly trade. Seeing as technical analysis will be a fundamental tool for trading exotic currencies, the MT4 platform will provide you with the means to practice using this form of analysis.
Access exotic currency pairs with T4Trade
T4Trade is popular broker among traders globally, with whom trading exotic currency pairs is possible. The broker is becoming renowned for its top-tier and flexible service offering to beginner and professional traders around the world. T4Trade traders have access to 300+ financial instruments across 6 asset classes.
These include CFDs on exotic currency pairs like USD/CZK, USD/HUF, USD/MXN, USD/PLN, and others. Also available are CFDs on futures, metals, commodities, indices, etc. Traders can also choose from multiple account types, designed to cater to a variety of individual trading needs.
Additionally, T4Trade traders can enjoy flexible leverage, spreads starting from as low as 0.0 pips, quick trade execution, fast and easy deposits/withdrawals, and dynamic multilingual customer support (24/5).
If you are only just getting started with trading, and still trying to advance your knowledge and skills, consider heading to our T4Trade Academy. Here you will find an abundant supply of material and resources, educational eBooks, expert webinars and informative articles.
Our experts insights will provide you with the necessary information to help you dive in. In addition to this material, you can also make use of our innovative, real-time Economic Calendar, an important tool for tracking global economic announcements and events. You can also watch our Live TV channel for daily commentary Monday – Friday, for more useful tips and updates.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
