/ Exotic currency pairs: What you need to know

The first thing you need to know is that you cannot lump all exotic currency pairs into one category. These currency pairs differ not only in liquidity and volatility, but also in the political and economic factors affecting them. The differences in risks and opportunities also make them unique to each trader.

Roughly speaking, they can be divided into two categories:

• On the one hand, currency pairs consisting of a major currency (USD, EUR, etc.) and a currency that is less internationally weighted but that originates from a politically and economically stable country. For example: Usd/Nok (USD/Norwegian krone);
• On the other hand, currency pairs consist of a major currency (USD, EUR, etc.) and a currency from an emerging market or developing country with a more fragile political and economic situation. For example: Usd/Zar (USD/South African rand).

As you can see, no matter which exotic currency pair you choose, it will always include one of the major currencies such as USD or EUR. This is important to keep in mind, as the major currency usually gives the pair some stability. However, this does not negate the fact that exotic pairs remain more difficult to analyse and predict.

The second thing to know is that such instruments are not suitable for beginners. This is not only due to the increased risks and instability, but also due to the fact that trading these pairs requires specific strategies different from those used for major currency pairs. Therefore, it is best to have considerable trading experience before taking on exotic currencies.

Disadvantages of exotic currency pairs

There are several disadvantages associated with exotic currency pairs that can significantly affect your trading results. These pairs are often characterised by low liquidity and high volatility, which increases the risk of unpredictable price movements. In addition, high spreads and commissions make trading these instruments less profitable for most traders.

Here are some disadvantages:

1. Often lack of liquidity: As mentioned earlier, you have to distinguish between exotic currency pairs like Usd/Nok, which will have more or less normal liquidity no matter what, and pairs like Usd/Zar, which will have a clear lack of liquidity. And lack of liquidity can be dangerous for your portfolio.
2. Poor volatility is very common: This is reflected in long candle wicks and chaotic price movements during the trading period, which makes forecasting extremely difficult. Similar phenomena sometimes occur on major currency pairs, especially during the release of important economic news, which traders tend to avoid due to high uncertainty.
3. Higher commissions: Much higher commissions make trading exotic currency pairs less profitable. With such high costs, even if you were to win all your trades, you would still be at a loss in the long run, so you should not trade these pairs without a well thought out strategy.

Trading exotic currency pairs requires special attention to risk and strategy. These instruments are suitable only for experienced traders who are willing to deal with low liquidity, high volatility and significant commissions. Before including them in your portfolio, carefully weigh the pros and cons and make sure you have enough knowledge to handle such complex instruments.

Benefits of exotic currency pairs

To understand the benefits and risks of exotic currency pairs, you need to understand economic policy mechanisms. Emerging economies often experience faster and more intense economic growth than developed economies such as France or the US. This creates unique opportunities, but also significant risks associated with economic instability. To keep inflation in check, these countries typically employ high key rates.

One of the most popular strategies in such markets is to use currencies with low interest rates, such as the Euro, US Dollar or Yen, to invest in currencies with higher rates. This process is known as Carry trade and can yield significant profits if applied correctly. However, it is important to remember that this strategy also carries increased risks, especially in times of economic instability. It is important to analyse the market carefully and have a clear plan of action.

Carry trade and working with exotic currencies can be extremely risky for inexperienced traders. Lack of experience can lead to incorrect assessment of the situation and significant losses. Therefore, this strategy is recommended only for those who already have sufficient knowledge and experience in Forex trading. Before starting such operations, it is necessary to study well the economic situation in the countries whose currencies are planned to be used in transactions.

Conclusion

In conclusion, trading exotic currency pairs can be profitable, but requires in-depth knowledge and experience due to the increased risks associated with low liquidity, high volatility and significant commissions. These instruments are not suitable for beginners and require specialised strategies. Before you start trading exotic pairs, make sure you have enough experience and understanding of economic mechanisms. Otherwise, it is better to focus on more stable major currency pairs.