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Why Trade in Exotic Currency Pairs?
Why Trade in Exotic Currency Pairs?
Why Trade in Exotic Currency Pairs?Why Trade in Exotic Currency Pairs?
The first thing smart traders notice about exotics is how much in pips these wonderful currencies can move on any given trading day.
Our charts show that the South African rand has an average daily range (ATR indicator) of 1,000 pips per DAY during an average trading year. Last year, during the credit crunch, the South African rand was moving more than 7,000 pips per day!
The British pound varied from moving 150 pips a day to 550 pips a day at the height of the credit crunch.
We have been able to see the real number of pips these currencies move per day is far more, in the exotic pairs, than in the majors even the volatile majors like the British pound.
We believe the reason for so much volatility is that exotic currencies mostly have smaller trading volumes than the majors. As a result, news events have more influence and move these exotic currencies, far more than the major currencies.
While watching exotic currencies, you will notice that these currencies suffer more erratic behavior. That's because traders in exotic currencies are usually in and out of trades faster. Forex traders want the better yields and pip movements that only exotic currencies can offer. When traders sense trouble, they act quickly to bailout of their positions.
Exotics Present LESS Risk on a Pip-to-Pip Basis
Some currency traders are drawn to exotics because of that volatility, while others reject them for that very same reason. When it comes to exotics, the payout in dollars, in these currencies, varies noticeably from their pip value.
As an example, when you trade into a major currency pair like the euro (EUR/USD) or British pound (GBP/USD), the usual risk is about a $1 each time your pair moves a single pip. You also earn about $1 per pip each time it moves your way.
Why one Risks Less in Dollar Value with Exotics
On the other hand, exotics only pay out about 12 to 63 cents per pip of movement. Therefore the amount you are winning or losing per pip is quite different than that of a major. The average trader is not aware of this.
That means your exposed dollar risk is lessened more than you may think when you play exotics, considering you're only risking 10-60% of a pip compared to a major currency pair in dollar terms.
For example, if you were trading the South African rand, you would have to trade approximately eight times the typical number of mini-lots in order to equal one mini-lot of the typical British pound (GBP/USD) trade.
In the case of the Turkish lira, you would have to trade about twice the lots you did for the GBP/USD to carry the same risk dollar-wise.
The Argument against Exotics
The Spread is way too Much! No Way!
Some use the argument about the pip spread difference between the major currency pairs and the exotics. There is a big difference in pips. But is this important?
Average spreads on exotics may vary between 50 200 pips vs. majors being 2-5 pips for instance. At the time you convert those "exotic pips" into dollars, you will find that the cost is around $24-$31. Yes, that cost is more than the majors BUT THE COST is not nearly as much as it appears when we talk about the number of pips that it costs per trade.
Some traders will argue that they would not trade an exotic pair due to that cost difference because a major pair would cost between $2 and $5. In our view they're not taking into consideration how volatile and how potentially profitable exotic pairs can be.
Exotic pairs can move 500 to 3,000 pips in one day. Just as you can cover the 2-5-spread cost in a major currency pair that moves 180 to 250 pips in one day, one can do the same thing with an exotic pair. Any currency pair that moves 500 to 3,000 pips in a day can easily cover the 50-200 pip spread cost.
The point is thisan exotic pair with a high pip spread is also volatile enough to cover that spread cost easily. An exotic currency can quickly cover its cost just as fast as the less volatile majors cover their spreads.
Exotics have higher volatility, higher spreads, but the PIP COST is LOWER. That helps reduce the dollar amount of the spread.
A bonus is that the daily interest earned on these pairs is usually a lot higher. When you call the direction right you earn significantly more interest along the way. That helps to compensate for any added risk.
Investor Sentiment as an Indicator!
Another difference in exotics over the majors is the availability of fundamental data on the currency. You can get it from the country's central bank site and you can get it from other trusted online sources.
It is often harder to get fundamental data that you can readily get for a major industrialized country.
An overriding factor with exotics is how risky investors are willing to be. When economies are either recovering or in a boom, exotic currencies tend to push higher. We see pushing of the USD/ZAR, USD/TRY, etc. pairs downward as foreign currencies increase value against the USD.
When economies crash around the world and traders get cautious, the exotics are usually the first ones they run from. This presents a great trading opportunity too, as these pairs shoot up as they run to the dollar.
Exotics can be a great trade in a positive OR negative trading ambience. They can achieve profitability of at least five times more than the majors. The time to trade is now! Economies are struggling out of a recession and stock markets are starting to show signs of recovery.
Whether you are a seasoned Forex Veteran or a brand new trader looking to do this on your own, be certain you do your homework and investigate the Exotic side of Forex.
If you simply don't have the time, or the pocketbook, to take the necessary risks and endure the often gradual learning curve, you don't have to be left out of this incredible opportunity.
Take a look at ExoticFX. We have taken the Fear out of Forex' by providing for you a fully Managed Fund with guaranteed results.
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