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How to trade exotic currency pairs

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Musa Makoni

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What are exotic currency pairs?

When people speak of forex trading more than likely the first pair to come to mind is the EUR/USD currency pair. Why? It is the most traded currency pair in the world with daily nominal trade value in the trillions of US Dollars. When you switch on your TV you will more than likely see it being quoted quite often along with other major currency pairs such as GBP/USD and the USD/JPY.

The forex market is wide and vast, and fortunately with GT247.com you have access to over 65 currency pairs which include some pairs that you might have never heard of. The focus for this piece is what are termed “exotic currency pairs”.

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Characteristics of exotic currency pairs

  • Not as popular as some of the major currency pairs such as the EUR/USD, therefore there is no consistent market activity in the pairs (you might not even know some these currency pairs exist)
  • Liquidity is very thin in the currency pairs hence the bid-offer spread is quite wide.
  • The huge difference in the bid and offer prices makes the currency pairs relatively expensive to trade as the pair has to move a considerable amount of pips for one to break even.
  • They are quite volatile and trade within a fairly wide intra-day range therefore there is great profiting opportunity if a trader gets the direction correct, however losses can be severe if one trades without a stop loss.
  • Margin requirements tend to be higher for exotic currency pairs compared to the majors due to higher risk.

Some key aspects to consider when trading exotics

 

Trade size

Some of you might have seen those 2 words a thousand times but I can’t stress enough how important trade size is. The only goal above making profit in trading is capital preservation, this is one way to ensure you don’t lose all you capital should you be caught on the wrong side of a trade. Trade a size that will not leave you in a precarious position should the trade go against you.

Source of impacts

For the major currency pairs there are numerous sources of economic of data and news which a trader can use to come up with trade ideas. This information is not as easily accessible for exotics and understanding the directional impact of economic data if available is not easy. Knowledge of country specific news with regards to monetary policy, sources of GDP growth and the general political environment becomes increasingly more important.

Traditional economic variables alone are not sufficient

Traditional economic theories apply less to exotic currency pairs compared to the majors. Sometimes trends are purely based on demand & supply, and are not necessarily a true reflection of country specific economic variables. This makes it fairly difficult to explain some of the movements based on economic theories. Exotic currency pairs are a classic example were technical charts can tell a better story about a currency more than any analyst can.

Shorter-term indicators

Short-term indicators are the best to use when trading exotics because of the large intra-day trading range of the currency pairs. Some exotics trade within 500 point intra-day range and in some extreme cases over a 1000 point range. Therefore only looking at a longer-term timeframe will result in a trader missing opportunities that are there intra-day, as well as exposing themselves to bigger losses.

Stop Loss Width

Unfortunately due to the volatile nature as well as the wide bid-offer spread of exotics your stop loss cannot be tight. Your stop loss has to be sufficient to allow for minor movements against your desired direction. This is where an understanding of the currency’s range is important.

Conclusion

I would not recommend novices to trade these exotic currency pairs. Forex trading is very risky and the risk is increased further in these exotics. If you have some background in trading forex then some of the opportunities available in these exotics are something that you might be interested in. The above is not exhaustive of all the elements you need to look out for but it can form a good base.

 

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Musa Makoni | Trading Specialist at GT247.com
 

Download GT247.com MobiTrader app and start trading from your mobile phone immediately with R100 000 demo money:

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