Exotic Currencies Trading: More Predictable Pricing Offers a Unique Forex Trading Experience
In the forex trading markets, about 60 percent of trades close out as gains. So we should all dump our 50/50 Blackjack odds and join currency trading platforms, right? Unfortunately, losing forex trades close out at a higher pip (point in percentage) than gains. If your average gain is five pips but average loss nine pips, you have had an unprofitable trading day. If you trade the major foreign currency pairs, then you know well how the tight price action in a small trading range can quickly turn a trade against you.
Beyond the major pairs, forex exotic pairs introduce a new world of risks and rewards in the currencies of emerging economies. While on one end of the risk spectrum, extreme price events such as a large devaluation are more likely, at the other end, technical pricing patterns are more predictable.
The foreign exchange market is comprised of major, minor and exotic currencies. The majors are the US Dollar, Euro, Japanese Yen, UK Pound Sterling and Swiss Franc. The minors are the major Commonwealth currencies (Canadian Dollar, Australian Dollar, New Zealand Dollar) and Scandinavian currencies (Danish Kroner, Norwegian Kroner, Swedish Krona).
All other currencies are considered exotic currencies. The most actively traded exotic currencies include the Chinese Yuan (CNY), Mexican Peso (MXN) and Singapore Dollar (SGD).
Why Choose a Currency Trading Platform with Exotic Pairs?
Exotic currencies are thinly traded currencies and consequently more volatile. In an exotic currency pair, one or both currencies have a low trading volume (e.g., US Dollar-Turkish Lira USD/TRY). The value is determined by how much of the quote currency (TRY) it takes to buy the base currency (USD). A cross rates calculator allows you to track current prices.
Exotic Pairs Risk
Exotic currencies are associated with countries with high political risk. In these developing economies, the risk is high that political changes or instability will cause depreciation in the exotic currency. Sudden political shifts (e.g., a coup d’etat) or currency devaluations are not unheard of.
What Moves Exotic Pair Prices?
All the world’s currencies trade on interest rate differentials influenced by the balance of trade and economic news. Exotic currencies are more highly influenced by political risks. Trump’s trade war with China in the summer, for example, caused the Yuan to fall by more than 20 percent from its January high.
An exotic currency is more likely to be tied to the performance of one or two industries that represent most of the country’s GDP. Examples are Venezuela’s reliance on oil exports and Brazil’s dependence on sugar cane. Changes in world sugar prices, for example, affect the GDP and thus currency price of Brazil.
Exotic Pair Forex Trading Platforms
If you are convinced your trading portfolio could be spiced up by a few exotic currency pairs, the next step is finding a forex trading service. Consider starting with a foreign exchange broker like Royal Capital Pro, recognized as one of the best forex brokers for exotics pair trading. To help you navigate the world of exotic pairs, Royal provides an account manager with forex expertise for all levels of accounts. When choosing a broker, remember to ask about the margin deposit, which may be higher for exotic pairs.
Pros and Cons of Exotic Pair Trading
Think of currency trading as a game of tug of war between the buy and sell side. When one side pushes, the other pushes back. Because of relatively equal buying and selling power, the trading action in a major currency pair such as the EUR/USD is in a narrow range. Forex exotic pairs typically have less buy-sell volume behind them and trade in a more predictable pattern.
- More predictable – In exotic pairs trading, on lower volumes, trading action is slower and the price trend more sustainable.
- Fewer market forces – In closed developing economies, fewer economic variables affect currency prices.
- Technically reliable – Better price predictability provides more reliable price signals.
- Less liquidity – A downside of thin trading volume is it is harder to exit a position owing to fewer counterparties to trade with.
- Higher volatility – Ensure the exotic currency pairs volatility meets your risk profile with a forex pairs volatility calculator.
- Devaluation risk – The rapid depreciation of an exotic currency whether by market events or central bank action is not an uncommon occurrence.
- Large bid-ask spread
- Higher transaction costs
The world of exotic pairs can be adventurous but risky. Research country and political risk, closely monitor correlations and paper trade in the beginning to familiarize yourself with the new forex trading terrain.