Getting started with trading exotic currency pairs
The forex markets are pretty much dominated by the major currency pairs, EURUSD leading the lot. However, there is a little/lesser known aspect of forex trading that is usually overshadowed by the majors.. and for a reason.
Before you get started with trading exotic currency pairs, you need to first understand the differences between the major currency pairs and the exotic currency pairs. In the following sections of the article, we give a primer on exotic currency pairs and the pros and cons of trading exotic currencies.
Major Currencies in Forex
The USD, EUR, GBP, CHF, CAD, AUD, NZD, JPY are the major currencies in forex. The reason they are called as major currency pairs is because of the high liquidity they posses, or in other words, high level of trading activity.
High volume of trading goes hand in hand with liquidity and this translates to lower spreads and of course a lot of action. Further more, the trading volume of these major currencies are more or less high in comparison to the volumes one can see on exotic currency pairs.
Major currency pairs in forex include a combination of the aforementioned currencies such as EURUSD, GBPUSD and so on.
Within the major currency pairs, there is a sub category that is refered to as cross currency pairs. Simply put, cross currencies do not involve the USD. GBPCHF or AUDNZD are some of the many examples of cross currencies.
The advantage with trading major currencies are many. Besides the liquidity they posses, the spreads charges by the forex broker is usually very low (in comparison to exotic currencies). Furthermore, based on the charts you are trading, it is possible to manage your risks well enough. Trading majors or cross currency pairs has a high level of interest as well. In fact hop over to any forum and you will find loads of discussions that involve majors and crosses but not much if you look for exotic currencies.
Exotic Currencies in Forex
When speaking about exotic currencies, the first thought that comes to mind with many traders is perhaps the ZAR (South African Rand) or the Mexican Peso. However, there is a bigger playing field than just these two currencies, which is what this article will focus on.
The term, ‘exotic currencies‘ comes from the fact that the list of currencies that fall under this category is because of the liquidity issues that comes along, or in other words, the trading volumes are much lesser.
However, that being said, trading exotic currencies nonetheless offers the same profit potential as that of trading majors or crosses.
So what are the exotic currencies that we speak about here?
For the sake of this article, we have selected some exotic currencies that have a fairly stable economy behind them.
NOK – Norwegian Kroner
SEK – Swedish Kronor
DKK – Danish Krone
CZK – Czech Koruna
PLN – Polish Zloty
The above exotic currencies are usually paired with either the EUR, USD or GBP as the base currency. So in effect, you would be buying or selling EUR/GBP/USD in exchange for the exotic currency.
Factors to consider when trading exotic currencies
Liquidity/Trading Volumes: Exotic currency pairs has lower liquidity and trading volumes in comparison to the popular currency pairs. This means that you could notice very small movements and in most cases, it could take days or perhaps hours to see a significant movement in the prices.
Volatility: Exotic currency pairs, due to the nature of the prevailing respective economies are more volatile in nature. They are more susceptible to regional new events, interest rates which could result in big spikes or surges in prices. Imagine, having opened a Long order on EURPLN and waiting for close to 3 hours to see a substantial price movement only to end up seeing a big surge in prices due to some local political or economic factor.
Spreads: Exotic currencies are not offered by many brokers and this is even more rare with ECN or No dealing desk brokers (with the exception of Lmax Exchange)
Trading platform: In most cases, exotic currency pair trading is available only on the MT4 (Metatrader) trading platform. So if you are accustomed to other trading platforms, it would be quite a task to find a broker that offers exotic currency pairs on a different trading platform.
The ones that do offer exotic currency trading do charge a high spread which can be a big obstacle. Imagine having to deal with a 25 Pip spread on an exotic currency that moves only a few pips every hour?
Exotic Currency Trading requires a different strategy
Exotic currencies require a different approach to trading majors or crosses.
In most cases, it is highly unlikely that you would be able to make good profits with intraday trading strategy. What does work with exotic currencies trading is swing trading (holding on to a position over days). This requires good money management strategy (Lot size and stops) as you need to factor in the aspect of volatility as well. A few such instances could potentially wipe out your capital.
What makes exotic currency trading easier is when you trade over a few days or even weeks. This makes your positions better immune to the day to day economic or other price influencing factors thus giving you a better chance at taking in profits.
In terms of trading strategies, the same indicators that you use for trading majors and crosses apply to exotics as well. But do pay attention to the spread. For example a signal from an EMA-SMA-PSAR and RSI set up might prompt you to either go long or short, but if the broker charges at 25Pip spread then unless the indicators are strong, you are likely to lose money rather than make any.
Forex Brokers with Exotic Currencies
Below is a list of forex brokers that offer exotic currency pair trading and includes the spreads they charge as well. Note that the brokers mentioned below was considered only on the previously mentioned currency pairs. You can do your own research should you wish to trade other exotic pairs such as USDTRY, etc.
|Join Deltastock||Join Markets||Join LMAX|
* Values represented in Pips for 5 decimal pricing
* LMAX Exchange experiences the best spreads during early European-London Session and early London-US Session
To conclude, exotic currency pair trading is worth exploring. It offers a good risk-reward ratio if you manage to learn how and when to enter/exit your positions. Also bear in mind that the swaps charged by the forex broker. As a thumb rule, forget about scalping when trading exotic currencies but rather look at holding your positions over a longer period of time. Exotic currency pair trading can offer you a totally different trading experience, compared to majors/crosses.