The foreign exchange market is comprised of major, minor and exotic currencies. Beyond the major pairs, forex exotic pairs introduce a new world of risks and rewards in the currencies of emerging economies. While on one end of the risk spectrum, extreme price events such as a large devaluation are more likely, at the other end, technical pricing patterns are more predictable. Exotic currencies are thinly traded currencies and consequently more volatile. In an exotic currency pair, one or both currencies have a low trading volume (e.g., US Dollar-Turkish Lira USD/TRY). The value is determined by how much of the quote currency (TRY) it takes to buy the base currency (USD).
An exotic currency will usually have better liquidity if it is traded against the currency of a major trading partner. The Turkish Lira is therefore usually traded against the Euro, the HKD against the USD or Chinese Renminbi and Mexican Peso against the US Dollar. You would struggle to find a broker offering a Malawian Kwacha/Swiss Franc pair, but even if you did, the spreads would be very wide. In most cases, exotic currencies from countries in or close to Europe are traded against the Euro, and others are traded against the USD.
Trading in exotic currency pairs can be tempting for several reasons. As traders gain experience, they often want to experiment and try their hands at something new. Even highly experienced traders can find switching to completely unfamiliar currencies to be an exciting challenge. Given the comparatively low volume and slow pace of trade, these markets can also become more predictable especially as you gain more experience in them. Technical analysts may find that unfolding chart patterns are easily readable and all this can be good for longer-term trades.
Forex trading is all about taking a calculated risk and it is perfectly possible to make a profit trading exotic currencies. As many exotic currencies are associated with smaller or emerging economies, there may be a possibility of geo-political issues upsetting those markets. Even if you are familiar with a given country and its economy to the point where you are able to trade the news on a reasonably accurate basis, there may be a general lack of expert analysis and research to back up your own readings of the situation. What research there does exist may exhibit significant bias without the balance of conflicting analysis.
When you decide to trade on the exotic pair, you need to possess a good knowledge of the chosen country's economy and politics. High fluctuations are often experienced during periods of political insecurity, therefore that kind of knowledge is an important factor. To make most of your Forex trading, you need a certain strategy before you decide to trade on exotics. One of the best strategies to choose (and possibly make some profit) is a long term trade. Do not consider going short on exotics due to quite high leverage they often require. That means you are raising up your trading fees, but on the other hand - in case your trade is successful - you can make a really good profit from it.
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