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A guide to trading the exotic currency pairs The three types of currency pairs Currency trading involves buying and selling a plethora of national currencies. In order to gauge the strength of a currency, however, we need to compare it against another, and this is why forex trading revolves around currency pairs. Moreover, the currency pairs available to trade in the forex market are classified according to their liquidity and popularity. As such there are three different currency pair categories: the majors, the minors and the exotics. The majors as you may already know, are the ones that include the U.S dollar and the currency of another developed economy. Notable examples of major currency pairs include the EUR/USD, USD/JPY, GBP/USD and USD/CHF. Since these national currencies enjoy stable supply and demand throughout the year, both from physical transactions e.g. imports/exports and speculators, there is enough liquidity and competition to make online trading quick, efficient and cost-effective. This is why the majors are ubiquitously the recommended type of choice for trading beginners as well as experienced traders. Next, we have the minor currency pairs, which consist of two major currencies, but this time, excluding the USD. Popular minor currency pairs include the GBP/JPY, EUR/GBP and EUR/AUD. Trading the minors can sometimes be a bit hit and miss as some of them can enjoy higher liquidity and trading volume than others and therefore, you need to ensure that you understand and keep track of the fundamentals before opening a position. Finally, we come to the exotics. These pairs are made up of the currency of a developing economy on one hand and the USD or the EUR on the other. Some of the most popular exotics available in CM Trading’s offering include the USD/ZAR, EUR/NOK and EUR/TRY.
Advantages and disadvantages of exotic currency trading While some types of currency pairs have undoubtedly some clear-cut advantages, the flexibility of online trading and the various trading strategies that can be utilized guarantee that any trading instrument can generate consistent results – as long as the trader invests the time to learn how to trade that specific market. In general, exotics are considered riskier since the lack of liquidity sometimes can create wide price gaps in the market. However, this may also translate to significantly
www.cmtrading.com increased profit potential as well. During high-impact events, it’s not uncommon for exotic currencies to fluctuate more than 30% throughout the day, which can prove to be highly profitable. This is the main reason why professional traders typically keep a few exotic pairs in their trading portfolio. High risk usually accompanies high reward and this rings true with the exotic pairs. Therefore, proper risk management rules and strict adherence to a trading plan become imperative when trading these volatile currency pairs. It is worth mentioning that trading exotic currencies can be much more expensive in terms of spreads as the bid and ask prices can fluctuate rapidly throughout the daily trading session. This can make hitting your profit targets a bit more difficult, however, making use of stop loss and take profit can help you avoid unnecessary exposure to risk and secure profits.
Exotic currency pair analysis One of the main differences between exotics and the other types of currency pairs is that exotics are much more vulnerable to fundamental events and geopolitical developments. While major and minor currency pairs attract a slew of traders that rely on technical indicators for identifying trade setups, the exotics generally favor fundamental traders that employ a macro-economic view in terms of market analysis. As you may already know, an economic calendar keeps track of all the upcoming financial and political events that are bound to affect a country’s economy and therefore it is highly recommended you make use of one to stay up-to-date with any events that may impact the exchange rate of the currency pair of your choice.
Conclusion Trading exotic currency pairs is largely unpredictable, but the same can be said for any currency pair. While there is increased risk in trading these often-illiquid currencies, the truth it that they offer much more profitable opportunities compared to their more popular peers. If you are looking for an exciting market to trade during times of reduced demand and activity in the major pairs, you can definitely consider adding one of the exotics on your daily charting and analysis regimen. Beginner traders are advised to start with a demo account first, in order to get a feel of the markets before they invest any real money into these highly volatile currencies.
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Interested in trading the exotics under CM Trading’s award-winning platform? Register now to get started! Author Fred Razak - Chief Trading Strategist at CM Trading
