Currency pairs are classified into three main categories: major, minor and exotic. Major currency pairs are made up of USD and another main currency. A minor currency pair is a pair made up of two currencies from the list of eight without USD. So what are exotic currencies?
Definition
Exotic currencies are basically all other legal tenders that are not part of the major group. Below are examples with relatively high liquidity.
- Chinese Yuan renminbi
- Indian rupees
- South Korean won
- Mexican peso
- Thai baht
- Russian ruble
- Brazilian real
Advantages of trading exotic currencies
Exotic legal tenders are called ‘exotic’ because they are more volatile than majors. High risks come with high rewards. A good understanding of how the market works and the ability to evaluate economic policies will help you gain profit from traders who look for quick profits without knowing what they are doing.
An exotic FX pair can fluctuate up to 5% a day. Combined with leverage and your initial trade capital, you can profit a large amount in a short period of time.
Disadvantages of trading exotics
As such assets have higher volatility and lower liquidity, there are more risks associated with handling them.
There is also a lot of research that needs to be done to familiarise yourself with the related country’s economic, political, and social situation. You will need to look at the previous history to see how the currency has been performing.
Mastering a legal tender is like getting acquainted with a stranger – you need to invest time into getting close to them.
How to trade exotic currencies
Trade your exotic currency with a major trading partner to benefit from better liquidity. For example, Turkey has a trade deal with the EU which means the EURTRY will be better than SGDTRY because Turkey does not have as many big trade deals with Singapore.
However, the safest option is to trade your exotic asset against the US dollar as most countries have trade deals with the US, and it is a relatively stable currency. This will minimize the workload of familiarizing with multiple assets because you already have knowledge of the USD.
In conclusion
Exotics are legal tenders that are not a part of the eight majors. They have higher volatility which offers profit opportunities but also can be a pitfall as the risk is higher.
