When it comes to forex trading, the US dollar is the world's most traded currency. Its volume is incomprehensibly high, as it serves as the de facto global reserve currency. In addition, its home economy is the strongest in the world, and currencies from any other large economy are heavily traded against the USD.
However, if you wish to go for something a bit more exotic than some standard trading pairs, the USD can help you out there as well. This is another benefit of it being the most popular currency to trade against in the world. Let's take a look at some of the best exotic forex pairs to trade.
Why should you trade exotic currencies?
Exotic currencies are currencies that you don't really hear about a lot. These are usually a lot more volatile, coming from smaller markets, and can be very susceptible to change. As such, a lot of traders don't really trust them and are often intimidated by the idea of investing in something so risky.
But, of course, where there's a risk, there are often some of the best trading opportunities when it comes to forex trading.
There are several reasons why this is the case. For example, whenever there is a breakout from resistance or support, exotics will move for real, and not just have a minor jump or drop. As such, they allow traders to use the next level of resistance or support as a very probable target. As you probably know, this doesn't often happen with major currencies, such as the USD, GBP, EUR, and alike, as these tend to be much more stable.
Another reason to consider exotics is that they tend to move a lot. They don't only move once every now and then. They will move often, and by quite a bit, so you always have an opportunity to enter a position and earn some money from these movements, provided that you know what you are doing.
Of course, they are unpredictable sometimes, as they could move 2,000 pips and then just stop without a warning or a reason. The reason for this is that only a small number of banks are trading them. As a result, when the move starts, it keeps rumbling along, and on and on it goes. Then, when it is over, there is no other large trader who would reverse the process, so the movement just stops stone cold.
Of course, all of this means that exotic currencies can be tricky, but they are also fun for traders who like the excitement and the challenge. Trading exotics will cut through the monotony of the more predictable markets, and make the trade interesting. You will feel like you are just learning how to trade for the first time again, which is a pretty great feeling that everyone usually only gets to experience once. Switching to exotics can help you re-live that feeling and make things interesting again.
Potential issues with exotic trading currencies
As mentioned, exotics are much less traded, which means that they are also less liquid. Markets with low liquidity are not as open to traders as those with higher liquidity, which is something worth keeping in mind. In the same way, you may experience exposures that you have not grown accustomed to, One example of this came in the second half of 2016, just before the US Presidential elections, when USD/MXN pair started to behave as a proxy for Donald Trump's prospects in the presidential run.
The concern of Republican victory threatening the country's trade with Mexico caused a lot of commotion, and the Peso became much more sensitive to the election outcome than the USD or any other currency.
Which are the best exotics to consider?
Now, let's talk about some of the best exotics that you may wish to get into. When it comes to exotic pairs, they typically contain one major currency that you can use as an access point to the exotic currency, as well the exotic currency itself.
The exotic currency, as mentioned, is often small, relatively unknown, and it belongs to smaller economies and developing countries. The small demand for these currencies also leads to them not being the most liquid ones, as we talked about earlier.
It is worth repeating that they may be the most volatile trading pairs, and that trading them can be quite expensive. Some of the examples include:
- USD/THB (US dollar/Thailand baht)
- JPY/NOK (Japanese yen/Norwegian krone)
- EUR/TRY (Euro/Turkish lira)
- GBP/ZAR (Sterling/South African rand)
- AUD/MXN (Australian dollar/Mexican peso)
- USD/VND (US dollar/Vietnamese dong)
- and more.
In the end, most exotic currencies are available this way, and you will find only a few, if any, that aren't paired against any of the more popular traded currencies, such as the USD, AUD, EUR, JPY, GBP, and alike.
In the end, trading exotics only brings you an advantage if you have one of the major world's currencies at your disposal. Of course, it also goes without saying that you need a lot of trading experience in order to enter these trades and earn money successfully, based on the currency's movement.
However, opportunities to enter the trade are quite often, as movements are common, and whenever they happen, they tend to be strong and impactful. Trading exotics is usually best for those who are looking to have some fun, experiment, and change their trading routine. It can break the monotony, but it can also result in losses, so you need to be careful and remember the golden rule — never trade more money than you can afford to lose.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and writes extensively about the financial markets and fin-tech industries.