Forex Exchange Rate: Currency Appreciation and Depreciation

What are Exotic Currency Pairs and How to trade them?

Major pairs are not the only currency combinations that can lead you onto a lucrative path to profitability. Some unusual and mysterious combinations exist beyond the realm of commonly traded forex pairs. Come and discover the captivating world of exotic currency pairs!

What are Exotic Currency Pairs?

Exotic currency pairs encompass thinly traded currency pairs with wide spreads. These pairs consist of developing or emerging market countries, typically involving two emerging market currencies. Alternatively, they may involve developed and emerging market currencies.

Exotic currency pairs exhibit low liquidity, limited market depth, high volatility, and low trading volumes. They present enticing prospects for forex trading due to their potential for superior returns compared to other currencies, but they also entail associated risks.

Here is a list of popular exotic currency pairs:

  • USD/TRY – United States Dollar/Turkish Lira
  • USD/INR – United States Dollar/Indian Rupee
  • USD/ZAR – United States Dollar/South African Rand
  • USD/MXN – United States Dollar/Mexican Peso
  • USD/BRL – United States Dollar/Brazilian Real
  • USD/RUB – United States Dollar/Russian Ruble
  • USD/THB – United States Dollar/Thai Baht
  • USD/IDR – United States Dollar/Indonesian Rupiah
  • USD/HUF – United States Dollar/Hungarian Forint
  • USD/PLN – United States Dollar/Polish Zloty

Countries with less stable economies, smaller financial markets, and lower trading volumes are typically associated with exotic currency pairs.

USD/TRY and USD/MXN are among the most popular exotic currency pairs.
How to Trade Exotic Currency Pairs in the Forex Market

Currency pairs in the forex market are divided into three main categories:

  • Major Pairs: The major pairs are the most traded major currencies against the US Dollar. These pairs enjoy high levels of liquidity due to the elevated trading volumes. Examples of major currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CAD. 
  • Cross Pairs (Minor): A cross currency pair is the currency pair that does not involve the US dollar. Despite enjoying sufficiently liquid markets, they are less liquid than the major pairs. The cross currency pairs with higher trading volumes are the ones that include a major currency. Some examples of cross currency pairs are; EUR/GBP, GBP/JPY, and EUR/CHF. 
  • Exotic Pairs: The pairs that include currencies of emerging markets. They are riskier pairs due to high volatility and low liquidity.

How to Trade Exotic Currency Pairs

Exotic currencies are more sensitive to changes in global risk appetite and interest rates. Like all currency pairs, trading exotic pairs should be backed by fundamental and technical analysis. Keep in mind that high price swings are always expected for exotic pairs.

So, is there an effective strategy to trade exotic currency pairs? There are multiple trading strategies to handle the price volatility of exotic pairs.

Breakout trading strategy:

Breakout trading involves traders aiming to take advantage of potential shifts in pricing trends by being proactive rather than reactive. This strategy offers the opportunity to stay ahead of the curve. Key indicators of a breakout include increased trading volume or volatility, which can lead to a significant directional price movement.

Range trading strategy:

Range trading enables traders to predict the performance of exotic currency pairs within specific support and resistance levels. This strategy is useful when markets are stagnant. To employ range trading, it’s crucial to define the range by drawing a trend line based on recorded highs and lows over a specific timeframe. Subsequently, placing buy and sell orders near the relevant ends of the range is recommended.

Trend trading strategy:

Trend trading relies on extensive technical analysis and research. It is a longer-term strategy where positions are based on price movements over an extended period. Implementing risk management measures such as stop-loss orders and trailing stops is important. Trends can be identified by drawing lines that connect the highest peaks or lowest troughs of the price movement. Patience is key when employing trend trading.

Exotic Currency Pairs Forex Education

Why should you consider trading Exotic Currency Pairs?

Adding exotic currency pairs to your trading portfolio offers several benefits:

  • Increased volatility: Exotic currencies exhibit higher price volatility compared to major currencies. This volatility can amplify profitability if trades move in the expected direction.
  • Portfolio diversification: Trading exotic currency pairs encourages diversification, reducing the risk associated with a concentrated portfolio. Over-reliance on a single market or instrument can lead to significant losses if that sector performs poorly.
  • More predictable pricing: Exotic pairs trading, especially on lower volumes, tends to have slower trading action and more predictable price trends. This predictability can be advantageous for traders who rely on technical pricing patterns.
  • Independent performance: Exotic pairs have fewer connections to other instruments like bonds or stocks. As a result, their performance is less influenced by macroeconomic factors. This allows for a more focused and refined trading strategy.

What are the risks associated with trading exotic currency pairs?

Exotic currency pairs offer plenty of opportunities but there are also factors that you need to take into consideration before adding them to your portfolio.

  • Risk: While their increased volatility does mean scope to make profitable trades, the flip side is that the price fluctuations can move against you and magnify your losses.
  • Illiquid: Because exotic currency pairs are less frequently traded than major ones, it is not always easy to find a buyer or seller to suit your needs. That could mean that, even though you’ve spotted an opportunity, you’re left unable to get into or out of the position.
  • Lack of information: When it comes to exotic currencies, there may not be the same wealth of material to base your research and analysis around. This could make it more difficult to shape a robust, well-informed strategy.

Can Exotic Currency Pairs Be Worth The Risk?

Exotic currency pairs offer high volatility and diversification but come with more risk due to their volatility, illiquidity, and political situations in their home countries. They have wider bid/offer spreads and limited analysis and news availability compared to major pairs. Exotic pairs are less predictable and not as linked to other instruments. 

Adding them to your forex portfolio can increase potential profits but requires diligent risk management. Ultimately, the decision to trade exotic currency pairs depends on the trader’s goals, risk tolerance, and strategy, requiring careful consideration and research.

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Exotic Currency Pairs Forex Education

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