How to Trade Exotic Currency Pairs in the Forex Market

What is an Exotic Currency？

Exotic currency is a rarely traded currency in the forex market, and playing a little role in the global financial system and not commonly used in international transactions. Usually, a currency of an emerging or a developing economy. Unlike major currencies like the Euro (EUR) and The Great British Pound (GBP), exotic currencies are more venerable to extreme price volatility due to the low trading volumes.

What are Exotic Currency Pairs？

Exotic currency pairsare the forex pairs that include one major currency against a currency of a developing or emerging market. For example, when a major currency like the US Dollar is paired with an exotic currency like the Turkish Lira, it is known as an exotic pair. Exotic pairs are not as liquid as majors or crosses, so they are characterized by higher volatility and price swings. USD/TRY and USD/MXN are among the most popular exotic currency pairs.

Currency pairs in the forex market are divided into three main categories:

• Major Pairs: The major pairs are the most traded major currencies against the US Dollar. These pairs enjoy high levels of liquidity due to the elevated trading volumes. Examples of major currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CAD.

• Cross Pairs (Minor): A cross currency pair is the currency pair that does not involve the US dollar. Despite enjoying sufficiently liquid markets, they are less liquid than the major pairs. The cross currency pairs with higher trading volumes are the ones that include a major currency. Some examples of cross currency pairs are; EUR/GBP, GBP/JPY, and EUR/CHF.

• Exotic Pairs: The pairs that include currencies of emerging markets. They are riskier pairs due to high volatility and lo liquidity.

Market Liquidity and Volatility Explained

Liquidity refers to how active the market is; how easily or quickly you can execute a trade. Typically, it is determined by the total active traders and total trading volumes.

High liquidity is one of the most common benefits of forex trading as it is accessible 24/5 with over $6 trillion dollars being traded on a daily basis.

The market‘s liquidity has a big impact on how volatile prices are. The more liquid a market is, the lower volatile the price is. That’s why most forex traded pairs like the EURUSD normally do not experience high price fluctuations. On the other hand, exotic currency pairs fluctuate more often due to low liquidity.