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Exotic Currency Pairs – Everything You Need to Know
Vitaly Makarenko
Chief Commercial Officer
Demetris Makrides
Senior Business Development Manager
The Forex market is represented by hundreds of currency trading pairs that are divided into major, minor, and exotic ones.
Exotic trading pairs combine a currency of a country with a developed economy and a currency of a country with a developing economy. Such pairs are characterized by higher volatility and lower liquidity. As such, traders face more opportunities, but higher risks.
Key takeaways:
- What are exotic trading pairs?
- What are the differences between exotic, major, and minor pairs?
- How to trade exotic trading pairs?
- Pros and cons of trading exotic pairs?
- Which exotic currency pairs are the most widespread for traders?
- Which strategies are the most profitable for exotic currency pairs?
Explanation of Major and Minor Trading Pairs in the Forex Market
USD (United States Dollar) is the world’s most used currency; which is why currency pairs that include USD are the most traded ones. Currencies that are traded to USD in the largest volumes are called major ones.
Traditionally, this category contains 7 major trading pairs known for the largest trading volumes:
- EUR/USD (28% of the overall Forex market trading volume);
- USD/JPY (13%);
- GBP/USD (11%);
- AUD/USD (6%);
- USD/CAD (5%);
- USD/CHF (5%);
- NZD/USD (4%).
As such, major trading pairs cover 72% of the world’s currency trading volumes.
Minor trading pairs consist of currencies included into major pairs, except for USD. Those are also called cross-currency pairs. Examples of minor trading pairs are EUR/JPY (4% of the overall Forex market trading volume), GBP/JPY (4%), EUR/GBP (3%), AUD/JPY (3%), EUR/AUD (2%), etc.
All other pairs related neither to major pairs nor to minor ones, fall into the category of exotic trading pairs.
What are Exotic Trading Pairs?
Exotic trading pairs consist of the two currencies:
- The first currency represents the category of either major or minor pairs (USD, EUR, CHF, GBP, etc.).
- The second currency is outside both major and minor pairs (TRY, RUB, INR, MXN, and so on).
Here are some examples of exotic trading pairs: USD/TRY, EUR/INR, GBP/SGD, USD/MXN, etc.
Convertible Vs Non-convertible Exotic pairs
Exotic trading pairs are divided into convertible and non-convertible ones. Non-convertibility means that a certain currency is hardly or nearly impossibly converted into other currencies. The slower economic growth a country experiences, the low convertibility its national currency is characterized by.
The category of non-convertible exotic pairs includes KPW (North-Korean Won), CUP (Cuban Peso), CLP (Chilean Peso), and other examples.
The vast majority of exotic currency pairs are convertible: TRY (Turkish Lira), SGD (Singaporean Dollar), MXN (Mexican Peso), and many others.
The Role of Exotic Currency Pairs in the Forex Market
Exotic currency pairs play an exceptionally important role in the Forex market, as traders get much more opportunities. While major and minor pairs take center stage, exotic ones partake in unique trading situations and provide traders with potentially higher returns. Furthermore, traders are able to diversify their portfolios with the help of exotic pairs.
At the same time, exotic currency pairs are understood as an indicator of what is going on in the Forex market. Those pairs are more sensitive to macroeconomic factors in the countries with a developing economy. Changes within exotic currency pairs make it possible to understand the overall situation and predict further movements of major and minor pairs.
Professional traders always take exotic pairs into account as they gain a comprehensive view of the Forex market.
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Pros and Cons of Trading Exotic Currency Pairs
What are the main advantages and minuses of trading exotic pairs?
Here are the core pros:
- Exotic pairs make it possible to get higher returns. Such pairs are characterized by high volatility; which is why promising trading conditions appear.
- Those pairs are suitable for all trading styles. Scalpers and intraday traders use such pairs to benefit from price jumps within short time periods. Swing and position traders add exotic pairs to their portfolios for diversification.
- Exotic pairs unlock access to economies that are impacted by rapid growth. In case of the right analysis, it is much easier to understand the direction where a currency’s price is going to move.
Risks related to exotic pairs trading are as follows:
- Exotic currency pairs are usually characterized by low liquidity and wide spreads that can make an order execution much harder.
- Such pairs are highly impacted by geopolitical and economic factors that frequently happen unpredictably. Political instability or economic downturns in the countries that one of two currencies represent lead to sudden and sharp price movements traders do not expect.
- The possibility of regulatory changes is one more risk related to exotic pairs trading. Some countries may impose restrictions and updated regulations that affect the domestic market. As such, traders need to be aware of regulatory changes in the countries whose currencies they have added to their portfolios.
Top Factors that Affect Exotic Currency Pairs
The three main factors that affect exotic currency pairs are economic indicators, political situation, and the important news of the country.
Economic indicators
When trading exotic currency pairs, you need to take the core economic indicators into account. Changes in GDP, inflation rate, employment rate, and other important indicators may significantly affect the value of currencies and help traders earn from price movements.
For instance, a country with high GDP growth and low inflation may attract foreign investors. Traders understand that investment infusion strengthens the value of currency; which is why they open long positions in such a situation.
Political situation
The political stability or instability impact exotic currency pairs significantly. Core political events such as elections, governmental crises, policy changes, revolts, and so on lead to the increasing of volatility and uncertainty of the value of the underlying currency.
Furthermore, the political situation also influences a country’s long-term economic perspectives and defines its rating among investors. Based on this information, traders may open long-term positions that include exotic currency pairs.
Important news
Like any other currencies, exotic pairs react to social, climatic and cultural events in the country. Meanwhile, exotic currencies are more influenced by such events.
For instance, flooding in Brazil has significantly reduced the value of BRL (Brazilian Real). The currency lost 14% within two days.
How to Trade Exotic Currency Pairs?
The popularity of exotic currency pairs among Forex traders is gaining momentum. Meanwhile, beginners may easily lose their money. How to trade exotic pairs?
Technical Vs Fundamental Analysis
Professional traders focus on either technical or fundamental analysis when predicting further price movements. Which approach is the best one for exotic currency pairs.
Technical analysis relies on historical data. With its help, traders determine the current trend, its strength, possible reversals, etc. On the one hand, technical analysis provides traders with important information; meanwhile, exotic currency pairs depend much on political, economic, climatic, and other events that happen in a certain country. As such, the main accent is put on fundamental analysis.
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The fundamental analysis approach involves assessing economic and geopolitical factors to predict the future movements of a currency. By studying economic indicators and monitoring current news, traders can identify potential trades and make correct decisions. However, it is important to keep in mind that fundamental factors cannot always accurately predict price movements.
The most effective way of predicting movements of exotic currency pairs lies in the combination of technical and fundamental analysis.
Top Exotic Currency Pairs
The Forex market contains hundreds of exotic currency pairs; meanwhile, one can point out the most traded and the least traded ones.
The most traded exotic currency pairs are USD/ZAR, EUR/TRY, USD/MXN, USD/THB, USD/SGD, USD/NOK, and USD/HKD.
Why is it important to know which exotic currency pairs are the most traded ones? Such pairs open new horizons for traders, but the least traded pairs are known for the highest volatility and the lowest liquidity. As such, traders face price gaps, high spreads, and unpredictable market manipulations.
The Most Widespread Strategies for Trading Exotic Currency Pairs
Here are the most effective trading strategies for exotic currency pairs:
Trend trading
Trend trading is the most common strategy for exotic pairs. Traders need to identify the current market trend and then simply buy or sell assets according to its direction. To identify a trend direction and its strength, traders mostly use the following indicators of technical analysis: Moving Average, RSI index, MACD, Alligator, Bollinger Bands, Parabolic SAR, and Stochastic.
Range trading
The strategy lies in opening positions inside a price range. In most cases, when a price comes closer to the upper or lower border, there is a high probability that it will return to a range. Professional traders utilize Bollinger Bands, Donchian Channel, and Keltner Channel for this strategy.
News trading
The main goal of the strategy is to open a position quickly after the news release. There are two different approaches. The first one lies in reacting to the news, and the second one requires waiting for the news to impact the market and then open a position in the opposite direction.
Recommendations on How to Trade Exotic Currency Pairs
- Utilize stop-loss and take-profit instruments to prevent heavy losses. Meanwhile, note that high volatility needs enough space – don’t set stop-loss orders close to the entry point.
- Strictly follow risk management rules when opening positions.
- Exotic currency pairs are highly impacted by economic indicators; therefore, thoroughly analyze the economic background before opening a new position.
- During the period of political and economic instability the market moves chaotically. Do not open positions during such periods.
Bottom Line: Are Exotic Currency Pairs Worth Trading?
Exotic currency pairs are less frequently traded than major or minor ones; meanwhile, they play an important role in the Forex market. Exotic pairs open opportunities for traders to get higher returns. Furthermore, traders can diversify their portfolios through adding exotic currency pairs there. On the other hand, such pairs are characterized by higher volatility and lower liquidity when compared to major and minor pairs; which is why traders need to pay much attention to the fundamental analysis.
