How to trade exotic pairs

How to trade exotic pairs

A currency from a developing nation is called an exotic currency because of its rarity in the forex market. Exotic pairs are formed when a currency from a developed, established economy is paired with currency from an emerging-market economy. In other words, it is a currency pair between a currency from a developed country and a currency for a developing nation. Currencies from the world’s strongest economies are called majors. When you pair a major currency with currency from a developing country, you get an exotic pair.

Take, for example, an exotic pair like the Hungarian forint (HUF) paired with the euro (EUR). The currency pair EUR/HUF is an exotic pair. USD/TRY (US dollar/Turkish lira) is another example of an exotic currency pair.

Why trade exotic pairs

Exotic pairs experience wide price fluctuations. That means one stands a chance to realize high returns due to wide spreads. But this also comes at a high risk of loss due to wider spreads. That is why trading exotic pairs is a game for the seasoned trader, with solid experience and knowledge on fundamental factors between the two countries.

The difficulty of trading exotic pairs

Wider spreads characterize exotic pairs due to price fluctuations, illiquidity, low trade volumes, and lack of market depth. They are rarely traded and contribute a tiny share to the total forex market. This makes them very risky to trade. Here are some things you should know about exotic pairs before you trade them.

• Exotic pairs are less liquid: Due to the high risk involved in trading exotic pairs, most market participants do not trade them, leading to less activity and low trade volumes. That increases the risk of order spillage as there are a few or no market participants to take the other side of your trade. Spillage occurs when your order is filled at a different price other than it was requested.
• They are more volatile: exotic pairs experience drastic and frequent price fluctuations.  Although such sudden and drastic price movements present an opportunity to make huge profits, such a profit comes at a higher risk of loss. You can either win or lose big.
• Exotic pairs have greater spread: Generally, the difference between the ask and the bid price tends to be wider on exotic pairs compared to their major and minor counterparts.
• Unlike major currencies that move because of economic data and interest rate differentials, exotic pairs are primarily influenced by economic and political instability. This can make an exotic currency to depreciate rapidly within a short period.
• Trading platforms may not provide economic data, and financial news feeds from distant and less developed countries. This may make it difficult to track and project macroeconomic factors affecting the demand and supply of currencies from such countries.

A list of exotic pairs that you can trade

There are as many exotic currencies as there are emerging-market economies. That means you have a whole host of exotic currencies to choose from. The most widely traded exotic pair is the USD/TRY (US Dollar/Turkish Lira). Here are some of the exotic pairs you can buy on most trading platforms.

• USD/TRY – US Dollar/Turkish Lira
• USD/DKK -US Dollar/Danish Krone
• USD/HKD -US Dollar/Hong Kong Dollar
• USD/SGD -US Dollar/Singapore Dollar
• EUR/TRY -Euro/Turkish Lira
• USD/SEK –US Dollar/Swedish Krona
• USD/ZAR -US Dollar/South African Rand
• USD/NOK -US Dollar/Norwegian Krone
• USD/THB -US Dollar/Thailand Baht
• USD/MXN -US Dollar/Mexican Peso

Strategies for exotic pairs.

There are various strategies that you can employ while trading exotic pairs to cushion your trade position from their volatility and less liquid nature. These strategies are widely used for trading other securities in the forex market, and they may come in handy when trading exotic pairs.

1. Range trading: the market is in a range when prices are neither in an uptrend nor a downtrend, but in a horizontal movement within a given range, say between $4 and $4.4.  As an exotic pair fluctuates within a range, a trader will seek to profit from the support and resistance (peaks and troughs) within the range by going short or long at the opportune time. Chart patterns come in handy to help a trader predict and confirm prediction on price movements in a range.
2. Trading breakouts: A breakout occurs when price movements break a historical support or resistance level. Let’s say that for the last few months, the price has been rising to a high of $5 before retracing back. If it eventually tests that support level and goes past it, it is said to have broken out the resistance level. While trading exotic pairs, a trader will have to combine both fundamental and technical analysis to determine the possibility of an impending breakout, and either go long or short depending on whether it is a resistance or support breakout.
3. Trading with the trend: an exotic pair may experience a downtrend or an uptrend, and the best trading strategy to use during such trending moments is trend trading. Trend trading mostly relies on technical analysis, but fundamental analysis can help you with quantitative data to determine whether it is a bearish or bullish trend. You can then make an informed, thoughtful decision to either go long or short, depending on the nature of the pattern.

The bottom line is that exotic pairs provide a different opportunity for traders to make a profit, other than just trading the dominant major currencies. It should not be forgotten that such an opportunity comes at high risk, given their volatility and less liquidity. Depending on one’s trading strategy and appetite for risk, exotic pairs can be a game-changer due to wider spreads, and frequent/sudden price movements.