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Exotic currency pairs include less traded currencies in the market, which have less liquidity and play a much smaller role in global trading activities.
Exotic currencies in the Forex market are traded at a low volume and are not commonly used around the world. Exotics include a major currency such as USD, EUR, and GBP on one hand while having a less traded currency on the other side, such as Singapore dollars, Swedish króna, or Polish zloty.
Some exotics may include two non-major currencies against each other, allowing traders to benefit from the diversion between the economies of the two currencies. Exotic currencies in the Forex market are considerably less liquid than major currencies, which makes them volatile and expensive to trade.
Some traders see the exotic pairs in the FX market as an opportunity to maximize gains. The high volatility yields higher returns when the price picks up momentum. We have prepared the following guide to explain how you can avoid risks and maximize your gains when trading these exotic pairs.
Exotic pairs are currency pairs in the Forex market that are less traded than major currencies. They are distinguished for having low liquidity and high volatility. Trading exotics usually returns higher gains for investors, but they are not as safe as the major currency pairs.
Exotic currency pairs usually include one or two currencies from developing economies, such as the Mexican peso, Turkish lira, or Thai baht.
Less traded currencies take one side of the pair, while a major currency like the US dollars, British pounds, or the Euro takes the other. This gives the trader some sense of security knowing that at least one side of the trade is safe from dramatic meltdowns.
However, some traders pick up exotics that include two currencies from emerging economies, such as MXN/PLN. In this pair, both currencies are from very different economies, with different growth and interest rates.
Since the MXN/PLN is less traded, traders are more likely to make higher gains on this pair, because it is more volatile. However, the broker’s costs might be higher to accommodate for the low liquidity in the market.
Exotic pairs in the Forex market have high volatility and can provide high returns when the market moves strongly in one direction.
However, not every exotic pair has good trading potential. Some pairs are positively related, and when one currency changes, the other currency moves in the same direction.
The following exotic currency pairs are commonly traded. They have a negative correlation, or their national economic factors change in opposite directions, which causes a diversion between their values.
This currency pair is shaped by the recent stability of the Thai economy. Despite the USA-China trade war, the economy in Thailand performed relatively well.
The heavy reliance on exports, bonds with low yields, and stable foreign debt were the primary driving forces behind this most recent economic recovery. However, the USD is known for most global changes, and local stability in political life, interest rates, and Federal debt.
The Euro managed to stabilize itself over the last few years, while the Turkish economy is dealing with increasing interest rates and currency instability.
Additionally, this pair is highly affected by the ongoing back-and-forth political situation between Turkey and the European Union. This primarily stems from Turkey’s application to join the EU and the criticism from EU member states over human rights violations and political tensions in Turkey.
This exotic pair witnessed huge volatility in light of the Turkish lira meltdown at the end of 2021, which saw the value of the lira decline more than 30% in just one week. This trend is still continuing in 2022.
This exotic currency pair is affected by the late improvement of the British pound after Brexit and the stabilizing of interest rates, while the ZAR is shaped by the country’s export of gold and agricultural products.
South African exports have struggled in recent years due to political misuse of the country's resources, affecting the economic growth of the country, which has caused some huge volatility against the GBP.
This exotic pair is shaped by two economies that witness stable growth. However, Norway relies on exporting oil, gas, and other petroleum products, and the value of the Norwegian krone changes according to global oil prices.
The Japanese economy enjoys a steady growth rate and low-interest rates, which makes it a safe haven for most traders. Therefore, any change in global oil prices causes this currency pair to fluctuate.
This pair is affected by the trading activities of Australia and Mexico since both countries rely heavily on exports as the driving force behind the value of the local currency. The Australian dollar is backed by exporting meat, milk, coal, iron ores, and other natural resources.
Being a commodity-based currency means that any change in the price of these commodities will affect the value of the currency. Thus, when trading this pair you must take into consideration things like climate conditions, supply and demand rules, and global import tariffs. All of these can affect the commodities prices, and change the volatility of this currency pair.
Exotic pairs in the Forex market include emerging economies, which might be risky, however, they provide higher returns due to the high volatility rates. Currencies from emerging markets have higher interest rates compared to stable economies. Mixing currencies from these two economies enable traders to benefit from the interest rate differentials.
Emerging markets are usually characterized by an unstable political environment, and changing economic indicators such as inflation, interest rates, and unemployment statistics all play a part in how the local currency is valued. Therefore, exotic pairs can be deemed risky, because they can fluctuate massively due to these factors.
Liquidity is another risk associated with exotic currency pairs. Since exotics are traded on a very low volume, they have liquidity issues, which leads to slippage and requires more time to execute an order in the market.
When a slippage happens during trading exotics in the Forex market, a trader might see their market position denoted with a different buying price than what they initially saw.
The majority of exotic currencies are commodity-currency, which means that the currency is backed by the country’s production and export of different commodities. However, when the price of commodities changes due to external or internal factors, the currency starts to fluctuate.
It might seem appealing to trade with exotic pairs, however, since they are less commonly traded, there can be a lack of information regarding historical price movement and analysis.
Unlike major currencies that make the headlines on most trading platforms and are always spoken about by market experts, you might find that when looking to trade an exotic pair you will need to do extra research to find proper market analysis or experts’ predictions.
Some Forex traders prefer exotic currency pairs over major pairs because they provide higher volatility. Also, it might be more interesting to trade them since they are different from common pairs and give traders a wider range of opportunities to choose from.
Since there are relatively few transactions happening with exotic pairs, the price is not inflated like with the major pairs, and any economical or political changes can cause severe price changes in these exotics.
For example, if major currency pairs in Forex move 100 pips during the day, exotic pairs might move more than 200 pips during the day, providing higher volatility and a wider price change.
However, exotic currency pairs in Forex are not necessarily always profitable, and trading exotics does not guarantee always gaining profits. While these price changes can earn you some good profits, they can just as easily go in the opposite direction and turn to a sharp decline, losing you your trading position and your money.
Another thing the trader needs to keep a close eye on is the broker’s fees. Usually, brokers set the trading fees within the spread, which is the difference between the bid (buy) and the ask (sell) price.
The broker’s spread is usually higher than the market's direct spread, and it works as trading fees. Alternatively, a broker may set a flat fee for every time you enter or exit the market.
If your trading session was not very successful, you still have to pay the broker’s fees, which might be, in some cases, higher than your gains from the trade. However, if you are trading exotics, there is a possibility to gain more pips in one trading session to pay off the broker’s fees and keep some net profits.
Exotic pairs require deeper research and analysis to pick the most potentially gainful pair. Additionally, a trader does not want to keep the market position open or active overnight, as sudden price changes might happen while he is sleeping.
Therefore, traders need to utilize short-term trading strategies such as scalping or day trading to maximize their profit potential. These strategies focus on gaining as much as possible from short-term fluctuations.
Scalping is a very short trading strategy that focuses on accumulating little repetitive gains during the day. Using the scalping strategy in trading exotic pairs helps the trader gain from the price changes caused by momentum, without remaining in the market for too long. You can learn more in our article "How Forex Scalping Works".
In fact, scalping entails entering the market and leaving it after 1 minute, 5-10 minutes, or 15 minutes maximum. This way, a trader gains from the price fluctuation that moves a considerable number of pips at the same time.
The volatility of the exotic pairs enables the trader to gain enough pips in one market entrance to offset the broker’s spread. The spread is imposed by the broker as a trading fee, which is expressed in pips. Bear in mind that most brokers do not offer zero-spread accounts on minor and exotic currency pairs.
Day trading in Forex also focuses on short-term trading, where the trader opens a market position when the Forex market starts operating and closes out the positions at the end of the day.
This way, a trader gives space for further price changes. If it did not change widely in minutes, or hours, the trader keeps it open until the end of the day, gaining from the daily price changes.
This strategy works with mildly volatile exotic pairs, as they mostly do not include the risk of a sharp price decline in a short time. Additionally, traders can use this strategy with exotic pairs that are backed by a stable economy like the Swedish króna or Singapore dollars.
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It depends on your trading strategy and expectations. Some traders prefer to diversify their Forex trading portfolio by stepping into exotic pair trading. However, other traders prefer exotics because they offer much higher volatility and risk, which can be thrilling for some Forex traders.
Exotic pairs include currencies from emerging markets, which are characterized by a weaker economy and less stable political situation. Therefore, not many traders are motivated to buy and sell these currencies. Eventually, the lack of traders leads to low liquidity and high volatility, meaning that there are few players in the game, and one change in the conditions can significantly impact every other trader’s market position.
There are almost 150 developing economies around the world and any currency from those can be considered exotic. However, most Forex brokers only enlist currencies with enough information about monetary and fiscal policies, provide proper economic figures, and employ market liberalism.