The majority of countries in the world have their own currency, but each country’s unique economic circumstances can vary greatly. For example, the United States is an economic power compared to a developing country like Uruguay, for example. For this reason, some currencies account for the majority of daily trading volume in the Forex market, while others are traded very little. In this article, we will explore exotic forex pairs, the most popular trading pairs, and how to trade them.
What are exotic forex pairs?
When the national currencies of two countries are paired together and traded in the foreign exchange market, we refer to them as currency pairs.
A currency pair such as USD/SEK consists of the base currency on the left (in this case, the US dollar) and the quote currency on the right (in this example, the Swedish Krona).
All currency pairs available today can be classified or grouped into three categories: major forex pairs, minor forex pairs, and exotic forex pairs.
Exotic forex pairs are traded less frequently and represent emerging countries and many developed European countries. The International Monetary Fund (IMF) served as the catalyst for the formation of the exotic currency group.
The most popular forex pairs
Exotic currency pairs typically involve one major currency paired with a currency from a developing or emerging country. Some of the most popular exotic pairs are USD/SEK, USD/NOK, USD/MXN, GBP/SEK, and USD/ZAR – depending on their daily trading volume.
Special consideration should be given to trading volume on exotic currency pairs because the demand for exotic currencies is much lower than for major and minor pairs. Lower demand results in lower trading volume and often highly volatile trading conditions.
Next, we will look at how to trade exotic forex pairs and the important factors you should be aware of with this group of currency pairs.
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How to trade exotic forex pairs
Image is for illustrative purposes only
Let’s first take a quick look at what the quoted prices for a currency pair look like on a chart and what happens to each currency pair when prices fluctuate up or down.
The image above shows the price chart of USD/SEK (US Dollar and Swedish Krona). When prices rise, the value of the US dollar will rise compared to the Swedish krona (green arrow). The opposite is true when prices fall – for example, the value of the US dollar will fall compared to the Swedish Krona (red arrow).
The published prices for the currency pair are shown on the right axis of the chart (black arrows).
When the USD/SEK pair is trading at 10.30, for example, all this means is that it would cost 10.30 SEK (Swedish Krona) to buy one dollar (US Dollar).
Image is for illustrative purposes only
The second image shows the bid and ask prices for the USD/SEK pair (on the right side of the image), which indicate the best potential prices at which the USD/SEK pair can be bought or sold at that time. The difference between the buy and sell price offered at any given time is referred to as the spread.
The first step required to trade exotic currency pairs is to place an order. This can be done by opening an order box (similar to the one above) via your broker’s platform. The second step will be to determine the price at which you want to buy or sell the currency pair.
Third, you will have to know what type of order to use as well as the position size you have chosen before submitting the order during the final step.
The chart image below shows an example of what the trading position will look like after the order is placed.
Image is for illustrative purposes only
Our final chart image shows an open short position on USD/SEK, where the red horizontal line represents the price level at which USD/SEK was sold.
The number 1000 indicates the position size, and the green and orange horizontal lines represent the take profit and stop loss levels.
For this trading position to become profitable, the USD/SEK pair would need to move below the sell level, but if the price moved higher instead, the situation would turn negative, and the trader would start losing money. Please be aware that trading is risky and can result in significant losses.
Please note that the example above may differ in appearance from your broker’s platform. With most trading platforms, it is also possible to see these order levels within the Trade and Order panel (not shown in the example).
Here is a quick list of important factors you should be aware of that generally affect exotic forex pairs:
- Wide differences: The difference between the bid price and the buy price, or spread, is often very wide when trading exotic forex pairs. Wider spreads indicate less liquidity. For example, the major currency pairs have much smaller spreads.
- Less liquidity: Liquidity is directly related to volume, and is an important factor that traders take into consideration. The more liquidity there is in the market, the easier it is to execute large trades without affecting the price of the currency pair significantly. Exotic currency pairs have less liquidity, which can lead to significant price fluctuations without warning.
- Slip top: Slippage refers to situations where a market order or stop loss order is executed at a rate worse than the price it was specified for. This generally occurs when there is a sudden and rapid change in price during periods of high volatility. The risk of slippage is much higher in currency pairs with less liquidity – such as exotic currency pairs.
conclusion
The group of exotic currency pairs represents the least amount of volume in the Forex market. With lower trading volume comes more potential risks, especially if you are a novice trader. However, traders who well understand the important economic factors affecting any given exotic currency often take advantage of these pairs. It is important to note that the market is volatile, and trades can also result in a loss.
We hope this article has helped shed some light on exotic forex pairs and whether you should consider trading them, especially after considering all the important factors mentioned before.
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