While major currency pairs see the most volume, exotic pairs offer seasoned traders new opportunities to diversify their portfolios and achieve higher returns. However, they also present unique challenges and risks compared to more popular pairs. This blog post will help you understand exotic pairs and provide tips on how to trade exotic currency pairs using strategies skilled traders use.
What are Exotic Currency Pairs?
Exotic currency pairs involve combining a major global currency like the US Dollar (USD) or Euro (EUR) with a lesser traded currency from a developing market. Some examples you might see include USD/TRY (US Dollar/ Turkish Lira) and EUR/HKD (Euro/ Hong Kong Dollar).
Since these types of currency combinations do not trade as frequently as more popular pairs, they provide new opportunities for skilled traders. However, they also typically experience a lot more up-and-down price swings.
Most Prevalent Exotic Currency Pairs to Trade
Some of the most prevalent exotic currency pairs that see high trading volumes include:
- EUR/TRY (Euro/Turkish Lira)
- SGD/ZAR (Singapore Dollar/South African Rand)
- BRL/TRY (Brazilian Real/Turkish Lira)
- SGD/MXN (Singapore Dollar/Mexican Peso)
- CNH/RUB (Chinese Yuan/Russian Ruble)
- EUR/ZAR (Euro/South African Rand)
- GBP/RUB (British Pound/Russian Ruble)
- EUR/MXN (Euro/Mexican Peso)
- MXN/ZAR (Mexican Peso/South African Rand)
These combinations pair major currencies with those from emerging economies. Their liquidity makes them easier to trade among exotic pairs.
Why Trade Exotic Currency Pairs?
Trading exotic currency pairs offers numerous benefits, including:
- Higher volatility: Exotic pairings are renowned for larger price swings compared to mainstream pairs, which allows for significant returns but also requiring careful risk management.
- Diversification: Adding exotic pairs to your portfolio provides different opportunities from standard currency markets. This spreads risk across varied markets as a useful balance.
- Unique influences: Each exotic pair reacts to unique economic and political events in their countries. This relative independence from overall trends presents specialized trading possibilities.
Traders can take advantage of the special characteristics exotic pairs possess to enhance returns, spread risks, and access new types of profitable situations.
Challenges of Trading Exotic Currency Pairs
While trading exotic currency pairings offers traders various advantages, it also carries certain drawbacks:
- Lower liquidity: With fewer buyers and sellers, exotic pairs can have wider price gaps between buy and sell prices. Filling trades at desired levels may be harder.
- Higher spreads: Brokers typically charge wider spreads for exotics due to lower volumes. This means you must account for these costs when calculating possible earnings and losses.
- Increased risk: The high volatility and unique drivers of exotic pairs mean rates can fluctuate dramatically. Robust risk control via tactics, e.g, stop-losses is a must to limit potential losses.
Exotic pairings’ lower liquidity and riskier profiles require traders to closely account for liquidity costs and actively mitigate risk.
Exotic Currency Pairs Strategies
Now that you know the definition and the pros and cons of exotic currency pairs, it is time to explore strategies for trading these special currency pairs.
Breakout trading
The first tactic to trade exotic currency pairs is the breakout trading. This method looks at both technical and fundamental analysis to spot when prices move strongly after being stuck in a trading range. You will watch for support & resistance levels on charts and then wait for a large move through those boundaries. Once a breakout happens, you may join the momentum and ride the price wave for great profits.
To find potential opportunities, you need to look for chart patterns like triangles wedges, and pennants. These patterns appear when the price stays squeezed together for a while as traders hesitate. They can indicate if the next big move will be up or down. Remember that breakouts do not always continue in the same direction, so be prepared to escape swiftly if the move slows.
Range trading
With range trading, you watch for a pattern where the price repeatedly bounces between a higher and lower value. These serve as resistance & support levels that form the trading range. To make money, you buy close to the bottom of the range and sell near the top. That lets you profit each time the price hits those range boundaries.
One advantage is that it involves less risk than other options. For exotic currency pairs that experience large, rapid movements, keeping transactions within a range reduces your losses.
Charts can also help by displaying patterns of tiny, predictable swings within the range. Your objective is to benefit from micro cycles in which prices vary between support and resistance levels. Following the sideways pattern keeps volatility exposure at a manageable level.
Trend trading
Trend trading will be an appealing approach for traders who want to ride the momentum rather than trying to forecast unexpected price changes. With this method, you will attempt to detect a pair’s trend and profit from the direction of its shift over time.
One plus of trend trading is its simplicity. Instead of attempting to evaluate complicated market conditions, you are just focused on the direction of the current trend. This makes it a more approachable method for inexperienced traders.
Tips for Trading Exotic Currency Pairs
Following these tips will help you successfully take advantage of opportunities in exotic currency pairs:
- Stay informed on economic news in the countries involved. Emerging markets can see larger swings on new developments.
- Focus on technical analysis like support/ resistance levels and trends. Lower liquidity means price drivers may differ from majors.
- Strictly manage your risk. Exotics see higher volatility so use tight stops in case trades move against you rapidly.
- Begin with small position sizes and trade gradually as you learn about a pair’s unique characteristics.
- Consider macro influences like commodity prices, currency indexes, and correlation to majors. Some exotics act similarly to other assets.
- Be patient with entries and exits, as thin liquidity means it may take longer to fill orders at desired prices.
Tools and Resources
Here are some useful tools and resources for trading exotic currency pairs:
- Economic calendars: It is crucial to use economic calendars to track important events and news. You should stay on top of announcements from central banks, new figures revealing economic health, and election-time politics that could move exchange rates.
- Trusted trading platforms: Traders need to select a trading platform with tools tailored for these exotic currency pairs, including up-to-date price charts and graphs revealing hidden patterns. Good client support is also an important aspect to consider when choosing your trading platform.
- Tutorials: Online guides and video courses introduce mechanics of trading exotics and explain nuanced macro links to understand. Community discussion provides perspective.
Armed with the proper informational tools, you can feel well-equipped to capitalize on opportunities that emerge when tracking uncommon but volatile currency cross-rates.
Conclusion
We have covered some tips and resources to help you navigate less commonly exhcnaged currencies with confidence. While exotic pairs take dedication to understand, following guidelines like staying informed, maintaining risk management practices, and gradually expanding exposure can help you trade exotic currency pairs like a pro.
Check out the WeMasterTrade Blog for further tips and insights that could help you improve your knowledge and skills.
