Trading The Exotic Currency Pairs
The currency pairs which are traded on the foreign exchange market can be divided into three categories – major currency pairs, minor currency pairs, and exotic currency pairs. The major currency pairs are the most popular ones and they are traded regularly. They are considered to be the drivers of the foreign exchange market. The minor currency pairs are usually the cross overs between the most traded currencies and the currencies which are close to the majors due to their liquidity and strong economy of their originating country, but they are simply not as recognized and acknowledged as the major currency pairs.
The exotic currency pairs might be seen as the sub-category of the minor pairs since they are also consisting of the cross-overs between currencies. However, when we speak of exotic currency pairs, we usually think of the really unusual and uncommon currencies which are not used as often in the foreign exchange market as the major or minor pairs. Trading with the exotic currency pairs is not favored by all traders and they might not be suitable for everyone. There are many pros and cons when it comes to these pairs and we will explore them furthermore in the rest of the article.
Reading a currency pair, the majors and the minors
When you make a trade on the foreign exchange market, you are basically selling or buying a currency. The bid price stands for the amount of the quote currency you need in order to buy a single unit of a base currency, and the ask price is the quantity of the quote currency you will get when you sell one unit of a base currency. In order to simplify this definition as much as possible, you are buying the base and selling the quote currency.
There are four major currency pairs and those are EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The majority of the foreign exchange market traders are buying or selling these pairings on a daily basis, and they make up around eighty percent of the daily turnover on the market. These currency pairs are very liquid and the exchanges involving the majors are done fairly quickly with absolutely no delays, meaning that the process of buying or selling will be carried out swiftly without the possibility of you being left with an undesirable currency. The difference in prices of the majors is not prone to uncertainty and rapid changes and therefore, they are the safest way to go when you are just starting out with trading on the foreign exchange market.
The minor currency pairs are usually the cross overs between the majors and most of them do not include US dollar as one of the constituents of the pairing. They offer more possibilities and options for a trader to choose from but trading with the minors can be more challenging since they are highly volatile and sometimes unpredictable. A trader should approach them with more caution and awareness, as well as with an already created and tested trading strategy made especially for the minor currency pairs. Surely, trading with the minor pairs is more rewarding, butif you fail to prepare yourself properly, the losses will be greater.
Introducing the exotic currency pairs
The term exotic currency is used to describe the currencies which are not traded as frequently as the major or minor currencies. It doesn’t mean that they are any weaker than the popular currencies – they simply have a different following and they are not in demand by every single foreign exchange market trader. The liquidity of the exotic currencies is not extremely high and trading with them presents a new set of challenges for a trader. The size or the location of the originating country does not play a key role in categorization of an exotic currency. Instead, it all comes down to the popularity of a certain currency in the foreign exchange market and the number of trades which are completed using that currency on a daily basis.
The exotic currencies are usually paired up and traded against the US dollar. The most common exotic currencies are Hong Kong dollar (HKD), Singapore dollar (SGD), Russian Federation ruble (RUB), Indian rupee (INR), Saudi Arabian riyal (AED), Egyptian pound (EGP), and many more. Due to the ever-changing geopolitical situation, the list of the exotic currencies is often updated and modified. Some traders put the currencies of the Scandinavian countries on this list as well, but since they have higher market liquidity than all the other exotic currencies, they obviously belong to the category of minors. As you might have noticed, all of these currencies come from large countries located in Asia, Africa or Middle East that have strong or blooming economies, and they have a high value. Therefore, the exotic currencies are not weak in any matter; they simply lack prominence and position.
If you decide to trade the exotic currency pairs, you have to know how to approach them as well as understand the pros and cons of these trades. Preparing yourself for this sort of trade is not different from the groundwork you are supposed to do when trading with any other currency pair. You have to do the proper examination and researchwhich is a standard procedure if you want to ensure you will not make a wrong move. Since exotic currencies are paired up with the US dollar, you have to start there. That means you need to study and analyze the economic calendar and the data releases related to it.
Then you should do the same with the exotic currency you have chosen to trade. The value of the exotic currency depends on the US dollar so exploring that part of the pairing shouldn’t be too difficult since the information is available almost everywhere. However, finding the details about the exotic currency of your choice might be a bit difficult since the data might not be in English language, or unavailable on the most websites which deal with the headlines and updates from the world of forex. This means you need to dig a bit deeper in order to find the documentation you need in order to do your research properly. The majority of experienced traders stay away from the exotic pairs partly because of this. The preparation for trading the majors or minors already consumes most of their available trading time and they simply do not need any additional analysis.
The traders who make a decision to invest their time into trading the exotic currencies can expect a huge profit if they do it properly and correctly. They are perfect for both long term as well as medium term trading and the fact that they are volatile can be beneficial in the long run. But there is a risk involved as well, especially with the low liquidity these pairs typically possess. It can make trading more difficult and the transactions are sometimes done with using the pre-determined or fixed rates. Also, the exotic currencies are prone to extreme fluctuations due to the political situations in their originating countries. The perfect example is the price of Russian Federation ruble which was affected by the conflict in Ukraine in 2014 and the aftermath can be still seen in the foreign exchange market.
Taking all things in consideration, it is obvious that trading with the exotic currency pairs is not recommended for novice traders or short term traders. The traders who are more experienced and know how to use wider spreads to their advantage can truly benefit from the exotic currency pairs. Also, the exotic currencies are more popular with the large investment firms or banks since they are the ones that normally use the long term trading. They simply have more money on their accounts and they can afford to lose some in order to make a profit over a longer stretch of time. Of course, if you are an individual trader and you have enough funds on your account, you are free to do the same. If you know how to do it properly, your profits will be larger.
The exotic currency pairs are not suitable for every single trader in the foreign exchange market. The risk is greater than with trading the major or minor currency pairs and they require more experience, as well as tremendous patience since the best way to trade the exotic currency pairs is by using the medium or long term positions.
If you are just starting out, it is best to stick to the major currency pairs and perfect your trading strategy and learn how the market moves and changes. But if you are an advanced trader who wants to take on another challenge, the exotic currency pairs might be exactly what you have been looking for. Clearly, you will have to modify the existing or even create a new trading strategy since the exotic currencies call for a different approach, but that shouldn’t be a problem since you are probably familiar with the market. The exotic currencies can be very appealing and if you learn how to trade them, the reward will come.