They exist, they can move wildly, and they can be very lucrative in the right hands I’m sure.
But are we better off trading them or not trading them?
“Do you trade exotic currency pairs?”
Eddie from Dayton, OH
I’ve answered this question indirectly already, but we need to sort some things out here.
And as always, you can listen to the podcast right here, or continue reading on.
What Is An Exotic Currency Pair?
There are multiple definitions.
One that I used to see years ago, and thankfully haven’t seen much of since is your less common cross-pairs falling under the “Exotic Currency Pairs” umbrella.
Pairs such as GBP/CAD, EUR/AUD, and NZD/CHF
You can honestly make a case for this.
I’ve referenced this site before. The numbers are from 2016, but things haven’t changed that much. Go here to see what I mean. The EUR/AUD for example has only a .3% share of all currency pairs traded in the world.
That’s the same percentage as the EUR/PLN (Polish New Zloty). That’s a small fraction of the USD/CNY (Yuan)!!
And it’s because of this, why you will hear people refer to some of these combinations of the 8 majors “Exotics”.
I don’t really agree with this, but it doesn’t matter. If you see anyone refer to pairs like this as “Exotics”, they’re not necessarily wrong, but most of us don’t put these pairs under that heading.
An exotic currency pair, according to just about everyone you ask, is any pair outside of the 28 combinations of the 8 majors.
And that’s the definition I’ll use from this point on.
Got it? Cool.
Why Exotics Get Traded
There are two main reasons I believe these get traded….
- The exotic currency is the person’s home currency, so a Filipino guy trading USD/PHP for example.
- Some people see turmoil or boom in a country and want to get in on the action
I get it, but these aren’t really solid, disciplined reasons to trade them.
There is added allure here too. Many of these pairs move a tremendous amount of pips per day. Their ATRs are astronomical at times.
I was so dumb when I first noticed this, I thought I’d be a millionaire with a good 3-trade winning streak in regards to these pairs.
I quickly saw all of my margin get eaten up. I traded it (USD/CZK) anyway, and got my ass kicked.
Thankfully it was on demo.
Super high ATR is not a benefit. Your broker is not going to allow you to trade 5 lots on a pair like this without serious margin penalties.
Don’t let any of these reasons persuade you to trade Exotics. They are not benefits.
I currently don’t trade any exotics. Here is why.
I hate news events.
Not only does my news event calendar, which I love and won’t switch away from not have news on anything outside of the 8 majors and the CNY…
Not only do more freak, out-of-the-blue news events happen more often in these countries…
When they do happen, the price of these currencies can move dramatically.
If I get a news event that goes against me on the USD/CHF, I can typically absorb it and wait out the storm before it starts going my way again.
If the same thing happened on the USD/ARS, I’d likely be hosed.
I put in all this work to ensure I have maximum control over my trading. The last thing I’m going to want to do is add needless currency pairs that take those advantages away.
And therefore I don’t think you should want this either.
Whatcha know bout the Singapore Dollar? (SGD)
The Singapore Dollar is remarkably stable. It currently moves closely with the Japanese Yen.
And news barely affects it!!
I traded it back in the day, was not allowed to anymore when my broker got rid of it, and now I can again because my new broker (Oanda) allows it.
I’m doing my due diligence and forward testing the crap out of it against all 8 majors.
The SGD may be added to my arsenal soon. How many combinations thereof remains to be seen.
I don’t have an inherent need to add more pairs 27 (soon to be 28) is plenty, but looking back on my past successes with the SGD, I’d be foolish not to add a few more of these along.
This is not a recommendation for you to trade the SGD. You have a lot on your plate already. I think more experience is needed before stepping outside the 8 majors, I’m just answering the question asked at the top of the page.
What About The USD/CNY?
You may have noticed in the site I linked to earlier, the USD/CNY is one of the most highly traded pairs out there, yet still counts as an exotic currency pair.
So why won’t I trade it?
I mean, high liquidity, my calendar tracks its news events, what gives? Why shouldn’t I trade it?
Same reason you shouldn’t trade it. The US and China are currently in a trade war. The media, and therefore the markets, love to flip the fuck out any time something speculative happens within this silly trade war.
Enjoy seeing minor news blurbs on the trade war get treated like nuclear war is breaking out.
Enjoy getting your stop losses taken out, without any warning.
Where do I sign up for this?
The same place you do — nowhere.
Stay with the 8 majors, and trade every combination of them. There’s no reason to step outside of this.
After awhile I’ll do the guinea pig work and see if the coast is clear on Singapore Dollar pairs. By then, you have more trades under your belt and can consider expanding.
But if you don’t, that’s a-okay too.