Understanding currency pairs is one of the most important aspects of being a successful trader. Moreover, different types of this asset require a specific approach and strategies. Exotic currency pairs in Forex are particularly interested in this regard. Therefore, it is worth taking a closer look at what makes these assets so attractive and what potential risks they entail.

Understanding Exotic Currency Pairs

To begin with, it is worth defining the concept of a currency pair. These are two currencies that are traded. An investor benefits from a change in the exchange rate in favor of the currency they bought at the expense of the other. The underlying asset in this aspect is the one that first appears in the pair. The second one is called the quote currency. 

There are quite a few Forex exotic pairs and possible options for changing their rates. This is influenced by various factors, which can be analyzed by a smart trader's assistant. You can find them on forexstore.com.

When working in the financial markets with currency pairs, it is important to understand that they are divided into several types:

  • Major
  • Secondary
  • Exotic

As for the latter, they differ from the major pairs, for example, in having a lower degree of liquidity. Such assets are also called third-world currencies. However, some exotic currencies have a unique price action and the potential for higher profitability than similar assets. This makes them especially interesting for a smart trader.

Opportunities in Exotic Pairs

Recently, this asset has been attracting increased attention from traders. Therefore, the question naturally arises: how to trade exotic Forex and get the most profit from it? The most popular option for working with such an asset is that each pair includes a combination of one currency from the eight majors and an exotic currency from a country whose economy is still developing. However, sometimes, there are also combinations of two exotic pairs, for example, NOK/TRY.

Working with such assets is a good opportunity for investors to diversify their trading. However. remember that exotic currency pairs have a much higher level of volatility than the majors. This significantly increases the risk of dealing with them but creates new trading opportunities.

One of the main advantages of exotic currencies is a fairly high interest rate. They are easy to trade through any broker. Also, this asset is less affected by market forces. It is not as popular as, for example, major currency pairs. Exotic currency options have a lower correlation with other financial instruments, which makes the impact of macroeconomics on them less significant.

The following strategies are commonly used to trade exotic currency pairs:

  • Scalping
  • Day trading
  • Position trading
  • Swing trading

Risks Associated with Exotic Pairs

Working with most exotic currency pairs has common features. The markets of developing countries are quite sensitive to changes in interest rates, and exotic currencies are less liquid than major ones. It is quite difficult to enter and exit at the price desired by the trader in such conditions. That is why, before starting to trade an exotic currency pair you are interested in, it is worth conducting a detailed analysis. A free Forex robot that can process a large amount of information quickly can help with this.

Trading in exotic currencies involves rather high spreads. For this reason, more capital may be required to work with such assets. As for the high volatility, it is positive and can also cause a trader to suffer losses. 

In general, working with exotic currency pairs is a rather complicated process, so beginners in financial markets should start with something simpler, such as trading major or secondary currencies.

The biggest risk when working with exotic pairs is devaluation. These assets are prone to major changes when governments make drastic policy modifications. Thus, money in developing countries can quickly depreciate. This is the greatest threat to a trader's assets and the source of quick and large profits. The only question is whether they made the right forecast and which currency they chose as a base.

Summary

Exotic pairs rank last in terms of Forex trading volume compared to major and secondary currencies. Nevertheless, this asset opens up quite a lot of opportunities for investors. However, it is important to remember that such work requires a high level of trading knowledge, as this is a specific area. Working in it involves great risks, but the prospects for large profits are also significant.