Exotic Forex Pairs to Trade : Benefits vs Disadvantages
Here are the main exotic currency pairs:
USD / HKD (US dollar / Hong Kong dollar)
USD / SGD (US dollar / Singapore dollar)
USD / THB (US dollar / Thai baht).
USD / MXN (US dollar / Mexican peso).
USD / ZAR (US dollar / South African rand).
Benefits? Here are three reasons why you should consider adding an exotic couple to your list:
1) They are "technically obedient". What does it mean? That if there is a breakout of a support or resistance, it can be taken for granted, and you can use the next level of support or resistance as a very high probability target. This is typically not the case with major couples, who are hostage to a number of other market forces.
2) THEY MOVE. As I mentioned earlier, exotic currencies tend to move a lot, which scares traders. However, no one has ever made a profit with a stagnant pair. For example, if the Turkish Lira is about to move, it will move a lot, and it will be scary. It will not be a 10 pips move which then stops to reverse the trend.
An important note: an exotic currency can move 2,000 pips and then stop, freeze completely. Because? Since only very few banks trade these currencies, once the movement begins, it continues and lasts for a long time and once it ends, there is no trader who can change things. Going back to our example with the Vietnamese Dong, this is why we have violent trends like the one in the chart above.
3) Finally, trading with exotic currencies is FUN. Aside from the word "exotic", which I am sure will arouse in you images of a beach in Thailand or palm trees in some picturesque bay, exotic currencies help eliminate the monotony of an otherwise boring operation. As a logical consequence, trading shouldn't just be an "emotional" thing, but why not enjoy what you do, especially if it's your job, your profession, or in some cases your life? In truth, it is much more fun to tell your friends that you "invest in the Dong" rather than "trade Forex".
A completely different question, and perhaps more suited to the next topic of our discussion, is what types of strategies to adopt with exotic couples? Currently, I have one that I use a few times a week and will share it with you.
Disadvantages of trading exotic currencies
- High spreads
- Political Risks
- High transaction costs
One of the most important points for those opposed to trading exotic currency pairs is the spread. While for a pair like EUR / USD you should only pay 1 or 2 pips, you may find yourself paying a spread of 50, 100 or even 200 pips on other less liquid pairs like USD / MXN, CZK / JPY, or even AUD / MXN. If you are already starting 100 pips behind, placing a profitable trade becomes a real challenge.
Another drawback is that exotic currencies are more affected by political risks. This summer, for example, Trump's trade war with China caused the yuan to fall sharply by more than 20% from its January high.
Finally, transaction costs for exotic currencies can be very high due to their low trading volumes. Only a few banks and traders actually trade such pairs.
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