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The Forex market focuses on major currency pairs, which are the most liquid and provide the best trading opportunities. Nevertheless, exotic currency pairs offer a different avenue for realizing a profit and diversifying an investment portfolio.
Exotic currencies are currencies from developing or emerging markets. They are not considered major as they are not easily traded in the forex market. Additionally, they are subject to partial or total exchange rate controls from the render. Some top exotic currencies include the Thao Baht, Uruguay Peso, Turkish Lira, and Hungarian forint.
Unlike major or minor currencies, exotic currencies are thinly traded and are not widely used in the global financial market. They are also illiquid, lack market depth, and can be highly volatile. However, given the reduced number of people trading them, they are subject to low trading volumes.
Nevertheless, the factors that affect major and minor currencies are the same that affect exotic currencies. They include geopolitical instability, strengthening of the country’s economy, monetary policy, and the level of foreign direct investment in the local market.
Some of the best exotic forex pairs to trade include USD/TRY (US dollar/Turkish lira), USD/SEK (US dollar/Swedish krona), USD/ZAR (US dollar/South African rand), TRY/JPY (Turkish lira/Japanese yen), EUR/TRY (Euro/Turkish lira), USD/CZK (US dollar/Czech koruna), USD/HUF (US dollar/Hungarian forint), EUR/HUF (Euro/Hungarian forint).
While trading exotic currency pairs, a few things must be considered. First, given the limited number of people or market participants betting on such pairs, they tend to be highly volatile. Therefore, wild price swings over a short period could come into play whenever a bigger-than-normal order hits the market, which offers the opportunity to realize profits quickly if on the right side of a trade. However, the risk of incurring significant losses is also high.
Additionally, they are less liquid, given the reduced number of market participants. While the EURUSD pair is the most liquid currency pair accounting for 23.1% of daily traded volume, USDTRY makes up less than 1% of traded volume.
Less liquidity increases the risk of slippage, whereby orders don’t get filled at the price one requested. It occurs when insufficient market participants take the other side of the order placed.
While exotic currency pairs can be traded through any broker, it is vital to master various trading strategies to take advantage of the extreme volatility always in play. Some of the best trading strategies for trading exotic currency pairs include.
Traders looking to take full advantage of the heightened volatility associated with the exotic currency pairs leverage the trend-following strategy. With the help of moving averages, traders can identify the underlying trend and place a trade in the direction of the trend.
In the price chart above, it is clear that whenever the USDTRY pair pulled back to the moving average, bulls used the opportunity to enter long positions with prices above the Moving average.
The technique relies mostly on technical analysis rather than fundamental analysis. Additionally, the focus is usually on long-term moving averages. Any pullback close to the moving average presents an opportunity to buy low or sell high in the direction of the trend.
Breakouts are a common occurrence when trading exotic currency pairs. With the breakout strategy, traders focus on support and resistance levels. Whenever the exotic currency pair is in consolidation mode, moving up and down within a defined trading range, it becomes much easier to anticipate breakouts.
With the help of moving averages, traders could ascertain the direction in which the exotic pair would break out in advance.
For instance, if the pair price is above the moving average, a trader can look out for a breakout to the upside from the resistance level. Likewise, if the pair is trading below the moving average, a trader can look to open short positions on the pair breaking through the support level and edging lower.
In range trading, traders can look to trade exotic pairs within a defined range as the price struggles to break to the upside or downside.
Consequently, whenever the price moves and nears the resistance level, a trader can look to enter a short position in anticipation of the price reversing and moving lower to the support level.
Likewise, a trader can look to enter a long position as soon as the price drops to the support level, only to be rejected and start moving up. Conversely, a price near the support level allows buying low in anticipation of an upswing.
The best exotic currency pairs stand out on their ability to provide the best opportunities to diversify a trading portfolio. The heightened volatility that such pairs come with also makes them ideal for people leveraging short-term trading strategies such as scalping. However, the high volatility also increases the risk of trading them as losses can accumulate significantly over a short period.
Exotic currency pairs are some of the best instruments for traders looking to take advantage of high volatility. The best exotic forex pairs to trade depend on the trader’s appetite for risk and the trading style. Given the high volatility, most traders choose not to hold exotic currency pairs overnight and deploy short-term and day trading strategies.