If you want to get into Forex trading, you’ll quickly discover that it is akin to exploring a diverse and dynamic marketplace, with each type of currency pair representing a unique opportunity. While major pairs are similar to the bustling thoroughfares, well-traveled and somewhat familiar, exotic pairs are like hidden alleys, often overlooked but holding the potential for undiscovered treasures if you know how to take advantage of them. Let's take a look at the opportunities that exotic pairs represent, so then you can discover potentially new FX trading opportunities and integrate them into your trading.
Understanding exotic currency pairs
For those who are new in the Forex market, let’s review how Forex trading works. The first thing to remember is that you always trade currency pairs, which means one currency against another one. If you decide to trade the EUR/USD pair, you will find the Euro (EUR) and the US Dollar (USD) paired together on your trading platform. The first currency in a pair is the base currency, while the second one is the quote currency. The quotation of each currency pair gives you the value of the quote currency for 1 unit of the base currency.
Depending on the currencies included in the pair, you can find major currency pairs, minor currency pairs or exotic currency pairs - each one offering opportunities as well as presenting limits.
While major currency pairs include currencies of large economies gathering the most trading activity and liquidity against the USD, such as the EUR/USD, the USD/JPY, and the GBP/USD, minor currency pairs or crosses are currencies from major economies which exclude the USD, like the EUR/GBP, the CHF/JPY and the NZD/JPY.
Exotic currency pairs belong to another category and include a combination of the 8 major currencies (Euro (EUR), American Dollar (USD), Japanese Yen (JPY), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), Australian Dollar (AUD), and New-Zealand Dollar (NZD)) with currencies from a developing or emerging market like the Turkish Lira (TRY), the Norwegian Krone (NOK), the Mexican Peso (MXN), and the Thai Baht (THB). It is also common to find exotic currency pairs with two exotic currencies like the South Africa Rand and the Turkish Lira (ZAR/TRY).
Exotic currencies, inherently tied to economies with heightened risk factors, present a distinctive profile characterized for instance by greater economic and political uncertainties compared to major currencies. This elevated risk is shaped by a multitude of factors, encompassing geopolitical uncertainties marked by political tensions, conflicts, wars, and corruption.
Moreover, the regulatory landscape introduces uncertainties related to policies and frameworks governing fiscal and monetary matters, impacting the overall economic stability of their respective regions. Economic instability, indicated by factors such as high levels of debt, trade imbalances, weak credit ratings, and dependence on specific industries, further contributes to the complex risk environment associated with exotic currencies.
Top exotic currency pairs to trade with ActivTrades and their target spreads
● EUR/HUF - Spread = 21.9
● EUR/MXN - Spread = 94.9
● EUR/NOK - Spread = 27.9
● EUR/PLN - Spread = 13.4
● EUR/SEK - Spread = 26.9
● EUR/TRY - Spread = 8.8
● TRY/JPY - Spread = 5.9
● USD/BRL - Spread = 100
● USD/CNH - Spread = 1.2
● USD/HKD - Spread = 0.5
● USD/HUF - Spread = 22.4
● USD/MXN - Spread = 24.9
● USD/NOK - Spread = 27.9
● USD/PLN - Spread = 10.9
● USD/RUB - Spread = 1000
● USD/SEK - Spread = 26.9
● USD/TRY - Spread = 6.4
● USD/ZAR - Spread = 46.9
Why trade exotic currency pairs?
● A way to diversify your investments
● An option to capitalize on less popular financial assets
● Many different trading opportunities
● Potential higher returns
● Higher volatility
● Lower competition as they’re less commonly traded
● Less correlated to traditional markets
● Possibility to take advantage of carry trade opportunities
Risk of trading exotic currency pairs
● High volatility
● Low liquidity
● Low market depth
● Low volume
● Risk of slippage
● Higher trading costs
● Economies subject to potential exchange rate and monetary controls
● Potentially difficult to find reliable data and information about the given economies
Exotic currency pairs trading styles
If you want to get into exotic currency pair trading, there are different trading styles you can use depending on your personality, time horizon and availability.
For those inclined towards quick intraday movements, scalping is the best option. The unique characteristics of exotic pairs, such as lower liquidity and higher volatility, align well with the quick and short-term nature of scalping, as it is a trading style that involves making numerous small trades throughout the day, capitalizing on minor price fluctuations over a few seconds or minutes. It demands quick decision-making, a keen eye for market trends, and the ability to react quickly to any changes.
Day trading is another active trading strategy defined by the opening and closing of trades within the same trading day. Day traders meticulously follow market sentiment and trends, aiming to capitalize on intraday fluctuations to secure profits before the trading day ends. One of the key advantages of day trading is the ability to avoid overnight fees and risks associated with holding positions overnight. This strategy also requires a committed dedication to monitoring the market during trading hours, but trading positions can be held from a few minutes to a few hours.
For individuals with a more patient approach and a slightly longer trading horizon, swing trading presents a viable option. This strategy entails holding positions for a few days to weeks, aiming to capture price swings within a broader trend from swing highs to swing lows. Swing traders seek to capitalize on short to medium-term market movements, necessitating a comprehensive understanding of primary and secondary market trends, along with a strategic approach to identifying opportune entry and exit points.
Given that each trading style presents a distinct set of challenges, risks, limits, and opportunities, the decision between scalping, day trading, or swing trading will largely hinge on factors such as your risk tolerance, time commitment, investment horizon, and trading experience. Additionally, individual preferences, trading capital, and financial objectives will also play a role in determining the most suitable trading style for you.
Best trading strategies to use when doing exotic pair trading
Currency carry trade
Engaging in a currency carry trade operation entails borrowing funds in a currency featuring a low interest rate and using the borrowed capital to make investments in a currency offering a higher interest rate. The primary objective for investors is to capitalize on the interest rate differential, and the potential appreciation of the currency pair to a lesser extent.
Although this strategy is typically linked with major currency pairs, it can be extended to exotic currencies, especially to the exotic currency pair including a exotic currency and a major one. However, using exotic currencies comes with elevated risk levels attributed to reduced liquidity, heightened volatility, political and economic uncertainty and the lack of reliable and trustworthy information. The key to being successful with this trading strategy lies in identifying an attractive interest rate differential, and frequently, emerging markets or smaller economies present higher interest rates compared to major currencies.
News trading
Upon the release of significant economic statistics and news, market participants, particularly those engaged in active trading, often quickly respond to the information published depending on the surprise between what was expected and what was published, as well as between the evolution of the underlying data.
This dynamic creates opportunities for individuals prepared to capitalize on heightened volatility and is known as the news trading strategy. In the context of exotic currency pairs, their value can be impacted by specific economic data originating from the smaller, exotic economy, and equally, by developments related to the major currency in the pair, such as decisions regarding interest rates.
Hedging
Hedging exotic Forex pairs is used when traders are worried about higher potential volatility over the short-term (like the volatility observed when doing news trading) to protect a trading position from a potential risk of loss (or any risk for that matter).
The most common known hedging Forex strategy is to open a trade in the opposite direction on the same currency pair—for instance, if a Forex trader holds a long position on the USD/TRY currency pair, then he or she will also open a short position on the USD/TRY of the same amount.
It is also possible to use the same technique but on two different currency pairs that are highly correlated. As per our example, the trader will choose to be long on the USD/TRY but short on the TRY/JPY for instance if both currency pairs are correlated.
Finally, when share investors hold stocks denominated in currencies other than their home currency, they are exposed to currency risk. Exchange rate fluctuations can affect the value of their foreign investments when converted back into the share investor’s base currency.
Therefore, stock investors may find hedging with exotic currencies beneficial when managing portfolios that include stocks from these less common or emerging market economies.
Correlation trading
Using correlation between different currency pairs- exotics but also majors and minors- is another strategy used by Forex traders to avoid being exposed to different trading positions that cancel each other and maximise their exposure to the currency market.
The first step is to calculate the relation between different currency pairs or to monitor it through a correlation table. The relationship between two financial assets is measured by the correlation coefficient that ranges between -1 (negative correlation where the two currency pairs move in opposite direction) and +1 (positive correlation where the two currency pairs move in the same direction).
Of course, correlations and the strength of the relation between two currency pairs do change quickly and over time depending on the market mood, diverging monetary and fiscal policies, geopolitical tensions, and economic factors among other factors. So you should always update your data or use trailing correlation over a certain period (depending on your time horizon) to get a better perspective.
Breakout trading
For those seeking to initiate positions early in a trend or leverage strong price movements that happen when prices break out chart patterns or break above/below key support/resistance levels, breakout trading strategies is the ideal option. These strategies are particularly valuable for capturing substantial market momentum when prices accelerate upwards or downwards.
To use breakout trading strategies effectively with exotic currency pairs is to learn how to discern the primary trend and pinpoint significant price levels on the chart. This involves a comprehensive understanding of technical analysis and drawing tools, including trend, key support and resistance zones identification tools and indicators such as moving averages, channels, triangles, etc.
Range trading
Range trading with exotic currency pairs involves identifying and navigating specific price ranges, usually marked by clear support and resistance levels. In markets lacking a distinct directional trend, prices often follow a horizontal channel, prompting traders—especially swing traders—to exploit the predictable movements within this range.
Executing this strategy entails purchasing near support levels and selling near resistance levels, with the goal of profiting from the oscillations of the currency pair between these boundaries.
8 reasons to trade exotic currency pairs with ActivTrades
- More than 20 years of experience
- Multi-regulated broker (FCA, CMVM, CSSF, SCB)
- Reliable execution (more than 93.6% of trades are filled at request price or better)
- Fast execution (average time under 0.004)
- State-of-the-art trading architecture (infrastructure built on IBM Cloud)
- Unique trading features (progressive trailing stop, pullback order…)
- Top 4 trading platforms available (ActivTrader, MT4, MT5, TradingView)
- Other assets classes to trade CFD through a diversifier strategy (shares, commodities, ETF, bonds, indices)
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