All currencies are traded in pairs known as currency pairs, which are made up of a base currency (the first currency indicated) and a quote currency. It represents the amount of quote currency you’ll need to buy one unit of the base currency.
In the currency pair EUR/USD, the most traded currency pair in the world, the Euro (EU) is the base currency, while the US Dollar (USD) is the quote currency. If the quoted price is 1.2000, then a trader will spend 1.20 USD to buy one EUR.
Currency pairs fall into different categories, and the type of currency pair affects the trading activity, liquidity, and by extension, the amount that a trader can make. For this reason, exotic currency pairs are gaining traction among traders because of the promise of greater returns.
Exotic Currency Pairs vs. Majors and Crosses
The most traded currency pairs in the world are the major currency pairs. These are attractive to traders because they represent the most stable economies across the world. Moreover, they have low spreads. Majors include:
Crosses, meanwhile, are currency pairs that don’t contain the USD. These are usually derived from major non-USD currencies like EUR, GBP, and JPY. For instance, Euro crosses include:
Exotic Pairs stand out from these pairs because they contain a major currency (usually USD) and a currency from a developing or emerging market. This exposes traders to currencies from Asia, Africa, the Middle East, and more.
Popular Exotic Pairs
Some popular exotic currency pairs include:
- USD/HUF (US Dollar/Hungarian Forint)
- USD/SEK (US Dollar/Swedish Krona)
- USD/TRY (US Dollar/Turkish Lira)
- USD/CZK (US Dollar/Czech Krona)
- USD/NOK (US Dollar/Norwegian Krone)
- USD/MXN (US Dollar/Mexican Peso)
- USD/ZAR (US Dollar/South African Rand)
- USD/THB (US Dollar/Thai Baht)
- EUR/TRY (Euro/Turkish Lira)
- EUR/HUF (Euro/Hungarian Forint)
- EUR/CZK (Euro/Czech Krona)
Reasons Traders Would Prefer Exotic Currency Pairs
Exotic pairs are not as widely traded as majors and crosses. However, many traders still gravitate toward them because of the advantages they offer.
- Chance for Higher Profit. Seasoned traders understand the long but fairly predictable trends in exotic pairs, which deliver high returns. Additionally, thanks to their growing economies, exotic currencies will likely make great leaps upward, compared to stable but plateauing major currencies.
- Higher Interest Rates. Interest rates in developing countries are usually higher than those in developed nations. This gap makes exotic pair trading attractive to carry traders.
Apart from higher spreads, traders often cite the lower liquidity and higher volatility as reasons they prefer majors and crosses.
Lower liquidity means exotic pairs tend to have less trading activity compared to majors and crosses. Fewer traders and a lower trading volume are involved.
Take figures from the 2019 Bank for International Settlements (BIS) Triennial Central Bank Survey. The USD/EUR, a major pair, accounted for 24.0% of all trading activity in 2019. In contrast, USD/MXN accounts for 1.6% only. Other exotic pairs also represent small portions of the trading activity, like USD/NOK (1.1%), USD/TRY (0.9%), and EUR/HUF (0.2%).
In a market with high volatility, prices change quickly and drastically. While it opens the doors for greater profit, trading exotic pairs also come with a greater risk of loss.
A lower liquidity with a higher volatility increases the risk of forex slippage. Slippage happens when a market order is executed or a stop loss closes the position at a price different from the order.
Popular Trading Strategies
If you’re looking to trade exotic pairs, here are a few strategies you can look into:
- Breakout Trading. This involves buying or selling when the price breaches a historical support or resistance level. It requires strong technical and fundamental analyses of price movements.
- Range Trading. This involves trading within a set range of support and resistance. A trader aims to profit from the peaks and troughs within the range.
- Carry Trading. This involves borrowing money in a currency with very low interest rates and using them to buy higher-yielding currency.
Leverage Exotic Currency Pair Trading with Fair Forex
Whether you’re seasoned in or new to exotic currency pair trading, Fair Forex will enable you to make the most of it. Fair Forex is a foreign exchange brokerage that offers some of the best rates in the market. Enjoy one of the lowest commissions and spreads, minimal withdrawal fees, and lightning-fast execution.
Start trading exotic pairs with Fair Forex today.