The Most Liquid Exotic Pairs in the Forex Market

If you think from the title that the most exotic forex pair means the lucrative pair, you are partially correct because just as they are lucrative, they are riskier. Forex trading always involves risk, but how much to take depends on the trader. This article will help you understand the nature of the most liquid and exotic pairs and how you can trade them.

Exotic Forex Pairs

There are various kinds of currency pairs (forex is traded in pairs). Some are the major ones that are easily traded, while the minor ones may take time to get executed. 

Exotic currency pairs are quotations that consist of one major currency (USD, EUR, GBP, JPY, etc.) and one currency from a developing country (SEK, TRY, ZAR, HUF, MXN, etc.). Exotic currency pairs are less liquid than major currency pairs and usually more volatile than major fx pairs in the foreign exchange market. Examples of exotic currency pairs are USDSEK, USDNOK, EURSEK, EURNOK, GBPSEK, GBPNOK, USDMXN, EURMXN, USDZAR, EURZAR, etc.

Talking about the exotic pair, any pair that is not major or minor can be considered to be an exotic pair. When we refer to exotic pairs, it is more about how popular the pair is and not how much developed or advanced it is. Also, being exotic doesn’t mean that the current is valued poorly, and it doesn’t matter whether the currency pair is minor or major. At the end, how much volume is traded by the traders makes a current pair exotic.

The Major Forex Pairs

These forex pairs are highly liquid and capture 85 percent of the market share.

As stated above, it is obvious to notice that the major forex pairs always have the American dollar on one side because it is a major currency. At the same time, the minor currency pairs like EUR/GBP do not have the US dollar.

The Minor Forex Pairs

Few of the minor forex pairs are popular, and sometimes they are called crosses. Some of the popular crosses include the Euro, British Pound, and Japanese Yen.

The Euro is also a very liquid and exotic currency and is the second most used currency after the US dollar. If we talk about the Asian region, the Japanese Yen wins the crown. In addition to that, the British pound ranks fourth in terms of usability after the US dollar, Euro, and Yen.

Should You Trade Exotic Currency Pairs?

As a trader, you can trade any pairs you want if you are sure and smart enough to trade it. Exotic pairs are highly volatile, and that volatility can also help you earn more. But it can be the other way around as well if you are a novice.

Volatility is the term used to state how frequent the price changes are. High volatility is always great for day trading, and in forex trading, it is valued too. The reason is simply that if the currency price doesn’t change, a trader would not sell and make a profit.

If you want to jump into this fascinating ocean of most liquid and exotic pairs, we suggest you first trade in the most popular exotic pairs.

Most Liquid Exotic Pairs

Liquidity means the pace at which transactions occur for an asset. If the transaction occurs frequently, the liquidity would be high as you will find a match to easily buy or sell the currency at your preferred rate.

Though in exotic pairs, liquidity is less as it can be tough to find a trader matching your preferred prices. Whereas in major and minor currency pairs, transactions are of large volume, and it becomes easy to trade.

The most liquid exotic pairs in the last 10 years are USDSEK, USDNOK, USDMXN, GBPSEK, USDZAR, MXNJPY, GBPTRY. These numbers change every day because of volume and volatility change based on economic impact.

If you want to analyze exotic currency pairs, then you can go to TradingView forex screener and then set the filter to exotic currency pairs, add volume indicators, and technical trend indicators on the screen.

Which are the Best Exotic Currency Pairs?

Well, to make your trading easier, we have got you covered with this answer. Remember that exotic things come with a price, and here volatility is the price you pay or get the advantage of. Also, trading in exotic pairs can be a little expensive.

Though the best part about exotic pairs is that you can easily predict them and find great opportunities regardless of major or minor.

Best exotic currency pairs are the fx pairs with strong bullish or bearish trend potential in the current trading period. If traders see clear trend direction and increased volatility, there are opportunities for a trend following system for that exotic currency pair.

The easiest way is to have the American dollar as one of the currencies. If you look at the price charts of exotic pairs having the US dollar, you will notice identical price patterns, making it easy for traders to gain profit. The US dollar is a strong currency and dominates the changes occurring in other currencies. So, if you have good analytical skills and an understanding of the US dollar, you can also dominate your trades.

Compared to the US dollar, other currencies like the British pound are hard to predict, but still, it depends on the trader to trader.

It is also true that exotic pairs are highly associated with technical analysis. So, if you are a pro in technical analysis, it becomes much easier for you to analyze the breakouts and enter the market at the right time.

Risk Involved in Exotic Pairs 

Exotic currencies pairs highly depend on several factors such as interest rates, the country’s strong economic wise, direct investment from foreign, and many more. The first step you should consider taking before entering exotic pairs is understanding the risk involved in it. You can do so by understanding the relations between those two countries and how they affect each other.

Most traders from developing countries are trading exotic pairs. That gives them an upper hand in knowing the nation’s economy and how it would affect trading.

Many currency pairs are very volatile and riskier to trade than other major or minor forex pairs. Also, exotic pairs are less liquid compared to the major and minor pairs.

Brokers Matter for Trading in Exotic Pairs

Before trading any exotic pair, you need to check with your broker for their services. Many brokers charge high for trading exotic pairs, while many brokers only offer major and minor pairs.

It is also a risky investment for brokers to provide exotic pairs, and that is why they charge higher for them to make a profit in the end. A few brokers also prefer their traders to have a large position to balance it for lower pip value.

On the other hand, many brokers suggest that a little long trade would benefit more – it can be a swing trade or a carry trade. As a trader, you should be aware that you will need to have wider spreads in exotic forex trading, increasing your risk, fees, and capital requirement to enter the trade.

The Big Mistake – Lack of knowledge

As a trader of exotic pairs, the biggest mistake you can make is to ignore the risk involved.  

Many exotic pairs are from economies that you may not be aware of, and it becomes crucial to stay updated with the news. If you do not know the language and end up reading poorly translated news, you can make a trade based on misinterpreted news.

Political ties and changes also affect nations, so you need to be aware of that too. Often such changes can create huge price fluctuations, which can affect the forex market big times.

You also need to have risk management in place. Like, most brokers trade an exotic currency for a major currency to reduce the risk. That is also the brokers’ option; rarely do any brokers offer two exotic currencies in a pair. As a result, you may notice a currency of developing nations trading against the developed nation’s currencies.

Being a trader, you can try it and decide what prefers you the best.

Stick to Major and Minor Currencies as a Novice 

Exotic pairs are definitely fascinating, but you should stick to the major and minor currencies if you are new to this field. They have smaller spreads and require less margin while giving higher leverage; it makes it safer.

The volatility is also very high in exotic pairs, which can scare traders to enter the market. In the end, you should be able to make consistent profits rather than making big profits casually. If you stay put in the market, you can turn things in your favor in the long run.

As a beginner trader, you are advised to stay aware and updated with the news and information available in the market to make informed decisions based on your analysis and sustain yourself in this arena. 

Several strategies can be applied to do trading on exotic currencies. Below mentioned are the top three strategies that traders use for exotic currencies. These strategies have been very beneficial to many traders.

Trend trading exotic pairs

The trend trading encompasses a procedure which involves studying the trend of the market very precisely. On identifying the exotic currency trend, you can opt to go for long or short, which entirely depends on the trend, whether it is bullish or bearish.

Trend trading is a technical analysis that is ascertained after studying the market trend. Though it is not a fundamental analysis, it is still regarded s a good way to build strategies for trading exotic currencies.

Based on scientific research (On Optimising Risk Exposures with Trend-Following Strategies in Currency Overlay Portfolios), exotic pairs tend to longer trends. Trend following and carry trade strategies on emerging and developed currencies, where findings reveal trend-following rules to work better for emerging market currencies.

Another science research paper (Do exotic currencies improve the risk-adjusted performance of dynamic currency overlays?) points that a greater potential for gains is available from exotic currency hedging using trend-following techniques than is the case with major currency pairs to the US dollar.

BREAKOUT TRADING:

Unlike trend trading, breakout trading is a combination of both fundamental and technical analysis. This is done to capitalize on an asset price and its movements after it breaks the resistance. Some of the charts you can go through while breakout tradings are pennants and triangles. Wedges charts are also beneficial during breakout trading.

Always ensure there is a risk while trading with the breakout strategy. This is because many times, the breakout could be false, and you can end up making wrong assumptions.

RANGE TRADING:

When trading of an exotic currency pair is done within a specified range of support and resistance, it is known as range trading. Traders can go both long and short of making profits from the peak staying in the range. Charts such as wedges and triangles are very beneficial while going through this trading strategy to confirm the predictions.

Exotic currency pairs enhance opportunities to earn more profits as they are more volatile but can be risky, too, as they are less liquid for traders. There are many instances where traders are willing to trade on exotic currencies without holding it overnight. Such traders are looking forward to small movements and are ready to make small profits rather than waiting long and earning good profit margins.

Top Points to Remember

For your reference, here are the top points for you.  

• Any pair that is not a major or minor forex pair can be referred to as an exotic forex pair.
• Exotic pairs are more predictable than major or minor pairs, giving advantages to trades who can read in between the lines.
• There is not much information and research available in the market for exotic pairs; there are also language barriers as most exotic pairs are from nations with English as a first language.
• You have to be updated with the events in exotic nations to know the changes expected in exotic pairs.
• As a beginner trader, you should trade in major or minor pairs rather than in exotic pairs as they are less risky.

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Fxigor

Trader since 2007. Currently work for several prop trading companies.

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