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Exotic currencies often have lower liquidity compared to major or minor currencies, which can result in wider spreads. It involves spreading your investments across different currency pairs to reduce the overall risk exposure. By diversifying your forex portfolio, you can potentially minimize the impact of unfavorable market conditions on your trading how to choose stocks for intraday trading performance. The answer, of course, depends on what kind of trading you’re looking to do. Overall, exotic currencies provide experienced traders with unique opportunities not highly correlated with the macroeconomics of other popular markets. Moreover, these instruments possess tremendous volatility, increasing the potential for massive gains.
Currencies that trade in higher volumes are called Major Currencies. The Turkish Lira used to have one of the lowest values of any currency, but has gained traction after a series of economic reforms in 2005. It is still a volatile currency, and has dealt with a debt crisis in recent years that caused its value to decrease again for a time. The Rand’s value also correlates to iron ore, platinum, and agriculture. If you want to understand what might happen to this currency’s value, you’ll want to keep an eye on how these sectors are impacted by political choices and even weather. There will likely be more volatility in times of political unrest in South Africa.
As the abbreviation indicates, the worth of the US dollar is measured against the Japanese yen. As several denominations in this article, the Japanese yen is one of the G10 trade exotic currencies. Having a well-defined trading strategy is essential for success in the forex market, especially when dealing with exotic currencies. Determine your risk tolerance, profit goals, and preferred trading timeframes.
The volatility can lead to unpredictable price swings, especially if there is significant unexpected political or central bank news, which may even be unrelated to the currency itself. For example, the election of Donald Trump in 2016 triggered a plunge in the Mexican Peso by more than 12% against the US Dollar. In forex trading, exotic currency pairs are those pairs that are less traded in the market. While the idea of being on your own little desert island in the market might excite you, these pairs work a bit differently from the majors – so you’ll need different strategies. Beyond that, many traders are looking to exploit the interest rates differentials in forex trading. This type of currency trading known as the carry trade forex trading strategy is usually more common when trading exotic pairs than trading major currencies or currency crosses.
Types of Currency Pairs in the Forex Market
They may be better termed as speculations, but ones that have the kind of upside potential that can’t be ignored. Let’s explore why you should add exotic currencies to your investment portfolio. Some examples of major pairs include the EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD. Obviously, the most traded currency pair in the world is the Euro Dollar (EUR/USD). Volatility is the term used to state how frequent the price changes are. High volatility is always significant for day trading, and in forex trading, it is valued too.
- Based on scientific research (On Optimising Risk Exposures with Trend-Following Strategies in Currency Overlay Portfolios), exotic pairs tend to have longer trends.
- By diversifying your forex portfolio across different currency types, you can potentially spread out the risk and take advantage of various market conditions.
- The forex market is the biggest industry in the financial market, with trillions of dollars being traded on any given day.
- These examples represent just a fraction of the exotic currencies available in the forex market.
- An exotic currency pair does sit somehow in the territory of emerging and frontier markets and is typically illiquid and thinly traded.
Exotic currencies, on the other hand, refer to currencies of emerging or smaller economies. These currencies are less liquid and have lower trading volumes compared to major and minor currencies. Examples of exotic currencies include the Chinese yuan (CNY), Colombian peso (COP), and Comoros francs (KMF).
What You Should Know Before You Start Trading
The reason is simply that if the currency price doesn’t change, a trader would not sell and make a profit. Typically, these trade exotic currencies come from countries with developing markets or small but stable markets. The exchange rate is among the most important indices of economic well-being in the countries concerned. High prices mean that they can easily import or purchase review capital markets and investments products and services, while low rates mean that they can quickly sell or export goods and services. That is why the monetary policies of the central banks are always aiming for a reasonable equilibrium at their prices. By diversifying your forex portfolio across different currency types, you can potentially spread out the risk and take advantage of various market conditions.
Keep reading to learn all about exotic currency pairs, how they differ from other pairs in the market and the most traded exotic currency pairs. Last in the list are the AUD / USD and the USD / CAD currency pairs. Both trade exotic currencies are tied to the prices of gold and steel, the leading producers of oil and gold. Exotic currency pairs are mostly made up of two emerging market currencies. An emerging market is a country that is yet to reach developed country status. They include countries like Turkey, South Africa, China, and Brazil among others.
As a trader, you can trade any pairs you want if you are sure and intelligent enough to trade them. Exotic pairs are highly volatile, which can also help you earn more. The value of a currency pair represents the amount of the quote currency needed to buy one unit of the base currency. Now, let’s take a glance at some of the most traded currencies, the top trading strategies for forex in 2019 but for the sake of this article, each of them will be simplified by a series of pair nicknames. Now let’s look at what has in store as well as what makes unique Forex trading relationships important. We receive very few price points (one price point per week for some currencies) from our data suppliers for some emerging market currencies.
This has made the pair appealing to many traders looking for a safe haven when trade negotiations get tricky between the U.S. and China. The British pound (GBP) is considered a major currency pair, while the South African Rand (ZAR) is more exotic. GBP’s relative value will primarily rely on the interest rates set by the Bank of England, and it will become more volatile if their interest rates decrease. Hence, when trading exotic currencies, you may want to consider a fixed or zero spread account where you have lower spreads and a fixed commission.
How to Trade Double Tops and Double Bottoms in Forex
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How To Exchange Exotic Currencies?
Many brokers charge high for trading exotic pairs, while many only offer major and minor pairs. Exotic currencies don’t enjoy the high liquidity benefits of trading major forex pairs. However, they tend to experience higher price fluctuations, giving traders an opportunity to take advantage. They are made up of one major currency paired with the currency of an emerging or less-established economy.
Understanding the characteristics of each currency type is crucial for forex traders. It’s important to consider factors such as liquidity, spreads, economic and political factors, and the implementation of risk management strategies when trading exotic currencies. For more information on trading exotic currencies, refer to our article on exotic currency. As with any form of trading, managing risks is essential when trading exotic currencies. Due to their lower liquidity and potentially higher volatility, exotic currency pairs can carry increased risks compared to major or minor currency pairs. Implementing risk management strategies is vital to protect your capital and minimize potential losses.
Exotic currency pairs are less frequently traded currency pairs involving the currencies of emerging or less liquid economies. They offer unique trading opportunities but require careful analysis and risk management due to their lower liquidity and increased volatility. To trade exotic currency pairs, choose a forex broker that offers this option and consider its fees, leverage and margin requirements. Also, look for good customer service, trading platforms, research tools and educational resources. Check out Benzinga’s comparison table of top brokers for exotic forex trading. Due to their lower liquidity and greater volatility, these currencies can be more unpredictable than major or minor currencies.