We already have an article in our blog that explains that in times of instability of the US dollar, it makes sense to leave trading in majors for now. Their moderate risk level is no longer relevant. More and more traders start to think about switching to other types of trading instruments. Of course, cross-currencies become their next choice. However, today we will talk about more interesting currency pairs - exotics.
Trading on this market is of a special nature and may be quite different from trading on more popular instruments. Let's find out about the main nuances of trading on exotic currency pairs.
Instruments From This Group
Exotic currencies come from the countries where the market and economy are still developing. Among others, I can name the following:
- Mexican peso
- Malaysian ringgit
- Turkish lira
- Russian ruble
- Singapore dollar
- Chinese Yuan
- Indonesian Rupiah
- Thai Baht, etc.
Trading Features
Trading on exotic currency pairs may differ from your usual system:
- Always set a Stop Loss on your positions. However, remember that due to the high volatility, the market will need some space to breathe. Set a pretty wide SL or all your positions might be closed right before the price goes in the direction you need. To control the risk, you can monitor the movement of the chart and move your Stop Loss to the breakeven level and further.
- Follow the risk management rules. This is especially true for the size of your positions.
- Exotic currencies are heavily influenced by economic indicators, including GDP and monetary policy. Before entering a trade, do a thorough fundamental analysis.
- Remember about a correlation with other currencies.
- Political events also have a huge impact on exotic currencies. During political instability or uncertainty, the market begins to move erratically. Even experienced traders find it difficult to deal with it. Therefore, in such periods it may be wise to temporarily abandon trading on such instruments.
Choosing a trading strategy for exotic pairs should not be difficult. The most optimal for them are the systems that are quite familiar to all traders:
- Trend trading. The most common strategy for exotic pairs and it’s no different from other instruments. You just buy or sell depending on the direction of the trend. This strategy is optimal for those who are not used to fundamental analysis since here the emphasis is more on the technical one.
- Range trading. Here you need to trade on price fluctuations (swings) inside the price channel. The type of transaction is also determined by the direction of the price movement. As a confirmation use triangles and wedges patterns.
- Breakout trading. The strategy is similar to other trading instruments. You also need to keep track of when the price breaks through an important price level. However, on exotic currency pairs, it is worth using both technical and fundamental analysis. Use pennants, wedges, and triangles patterns in these markets. Try to wait until the price passes a few points after the breakout to make sure that it was not false.
Benefits of Exotic Currency Pairs
- High profit. While on majors and cross-currencies the chart passes 50 points in normal conditions, on exotics it might cover a distance two or three times longer. Due to the high volatility, these pairs open up opportunities for significant profits.
- An alternative to majors and minors. When the volatility in the main markets falls, traders have to sit out due to the lack of trading setups. Exotic pairs have an inverse connection to the majors. That provides an excellent chance of making profits while the market moves sideways on other instruments.
- Hedging. Again, due to the connection with major currencies, you can hedge your positions on exotic pairs. However, this will require special skills due to high risks.
Main Disadvantages
- Tangible potential profit entails significant risks. Without proper control, you can quickly lose your capital.
- Transaction costs are usually much higher on exotics.
- Due to low liquidity, you may experience slippage more often.
- In order to successfully trade on any exotic pair, you need to study in detail the current political and economic situation in the country and constantly monitor the news.
- Due to the low popularity of these instruments, only a few of them can be found in the economic calendar. You’ll need to use other sources.
To Summarize
I believe that exotic pairs are underestimated. Yes, the risk on them is quite high but the potential profit is totally worth it. If you have already gotten your hand into trading on majors and cross-currencies, it makes sense to try trading on exotic pairs as well. However, choose only one for yourself, to begin with. And preferably the currency of the country that you have the most knowledge about. Your home country is the best solution. Ready to challenge yourself?