Exotic currency pairs at Forex
We know that most trades in the currency market are conducted with the currencies, which have strong influence on the world economy. The list is headed by the currency pairs EUR/USD and USD/EUR, and followed by the pairs USD/JPY, GBP/USD and USD/CAD.
There are also some currencies, which are not very popular among traders, as their influence on the economic situation in the world is not very significant. Such currencies are called exotic.
Exotic currency pair is a trading instrument with low liquidity in the market, which has no straight-forward effect on the economies of the other countries or global economy as a whole.
The list of exotic currency includes the USD in the pairs with the Russian ruble (RUB), Norwegian Krone (NOK) Chinese yuan (CHY) or South African Rand (ZAR).
The beginners and many experienced traders at Forex ask a question: it is possible to make profit trading exotic pairs?
Traders’ doubts are based on the following threats:
- High volatility. Usually high volatility has beneficial effect on trades; however, volatility in the exotic currency pairs can be so sharp that an inexperienced trader bears risks of losing all money on the account. It happens because relatively small number of traders trade exotic currency pairs.
- Big size of spread. Brokers, providing services for transactions with the exotic pairs, take high risk. For this reason, they increase spreads.
- Low liquidity. Exotic currencies have low demand in the market.
- Exotic currencies are strongly dependant on the internal changes in their countries.
- They are strictly controlled by the National Central Bank.
- It is difficult to make forecast based on fundamental analysis, as there is no much news, which cover these currencies, analysts do not make forecasts and issue releases devoted to these currencies.
Based on the above, we can conclude that when a trader decides to trade exotic currency pairs, he/she shall adjust classical strategies, or methods of analysis to his/her needs and take into account high risk.
If the exotic currencies cause so many problems, why anyone will want to use them for trading?
Because trading of the exotic currencies has its advantage!
- First of all low liquidity currencies have not been thoroughly studied. An experienced trader will encounter wide options of future developments of the currencies movement and he/she can select and test various strategies. A trader, who takes a challenge to trade exotic pairs, is a pioneer! His/her experience will be studied in future and will become a basis for building up future efficient trading strategy.
- Exotic currencies are well-suited for the long-term and intraday trading.
- Application of the money management, which is familiar to every trader, will help to use all the advantages of the exotic currencies.
- Efficiency of trading exotic currency pairs can increase if a trader will use relevant methods of fundamental analysis, based on economic, political and social news.
- Every year, there is more and more news and information on the exotic currencies, which can be used by the analysts for preparing analysis, press releases and business forecasts. Nowadays, there is a lot of information about the Russian ruble.
We think that traders who live in the country of the currency circulation better understand specific of the currency movement and factors affecting movement direction, which will help to make accurate forecast.
Speaking about the Rouble we can say that oil prices and the price of wheat will affect movement in the currency pair with the Rouble, as well as the over economic and political situation in the country. Trading with the pair USD/RUR is recommended for experienced traders.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.