It’s widely accepted that some of the riskiest online trading opportunities in the financial markets, just as in life, also carry some of the highest potential rewards.
That’s the case with forex “exotics”, which is the term used to describe currencies from emerging and developing countries.
For traders with a high-risk profile, exotics present a huge and largely under-the-radar opportunity. It’s estimated that around 75% of forex trading volume is dominated by the “majors”. Yet there are thrills, spills, and many bills up for grabs in the 25% corner of the forex market.
Examples of forex exotic pairs include:
- EUR/TRY (Euro/Turkish Lira)
- EUR/HUG (US Dollar/Hungarian Forint)
- USD/ZAR (US Dollar/South African Rand)
- USD/PLN (US Dollar/Polish Zloty)
- USD/MXN (US Dollar/Mexican Peso)
And, there are plenty of others.
What’s So Attractive About Exotics?
One word – profit. Another word – potentially. Because of the relatively low liquidity levels, the exotic markets are subject to higher-than-normal levels of volatility. Prices can easily surge or crash. That’s where both the danger and attraction lies.
Most exotic pairs are also historically inversely correlated to the majors, and are frequently used as trading opportunities when opportunities in traditional markets are not bountiful.
Features of Exotic Currency Pairs
Low Liquidity Levels
Perhaps the key defining characteristic of exotic pairs is their low levels of liquidity. Because a relatively low number of banks and traders are heavily invested in exotics, these low trading volumes make the transaction costs quite high.
Spreads are considerably higher than what you might expect from majors. But it’s not fair to look at spreads in absolute terms. The time it takes for majors to go up or down 100 pips, some exotics can move 1,000 pips.
You should probably look to open exotic trades during the market hours of the home country in order to get the fairest spreads.
Also, aim for profit potential on your trades that are considerably higher in pip-value than your margin.
Volatility, Volatility, Volatility
Be prepared for price swings of thousands of pips. That’s the whole point of trading exotics. Again, with hugely rewarding opportunities comes commensurate risk.
Because of these huge intra-day price swings, it’s wise to use short-term indicators to predict price movements.
You’ll also require market endurance and a solid understanding of geopolitical and economic impacts of relevant countries and regions. Which brings us to our next feature of exotics.
Unstable Geopolitical Situations
Emerging and developing nations are highly prone to sudden fluctuations in circumstances that tend to affect their currencies. Make sure to read up on the fundamentals of the situation on the ground, and conduct a thorough technical analysis of the pair to get a firm idea of the price swings you can expect.
Exotic pairs tend to attract a high number of technical traders. This is because historically, exotics have tended to display more “technical obedience” than majors. That means for example, that when an exotic pair breaks key resistance or support levels, it’s likely to go on to exhibit behaviour in line with expectations of such breaks.
Keep in mind, that doesn’t mean you should ignore fundamentals. On the contrary, fundamentals should be a key part of your early research – use what you know about the country or region to forecast long-term trends, and then use technical analysis to find trade set-ups that align with your fundamental direction.
- Only trade exotics if you’re willing to accept the risks involved.
- Make sure to have an account with plenty of margin to protect yourself against large price swings.
- Wide stop losses and take profits are the names of the game. Exotics will go up and down in drastic fashion before establishing their final trend.
- Restrict yourself to trading currencies of regions that you have good information about.
- Look for correlations between the exotic pair and related instruments. For example, because South Africa is a major exporter of gold, look at the historic correlation between the South African Rand (ZAR) and gold. Then before you trade, check how gold is behaving.
For high risk-profile traders who are well informed, trading exotics can be hugely rewarding. Just be sure to keep the risk management strategies outlined above in mind. For more information on the currencies available at TIOmarkets, visit www.tiomarkets.com