Trading Exotic Currency Pairs: Opportunities and Risks

Discover how trading lesser-known currencies can offer you new earning opportunities. And with STIC Cashback refunds, trading exotic currency pairs is even more advantageous.

For an experienced trader, exotic currency pairs such as USD/THB (Thai Baht), USD/MXN (Mexican Peso), USD/INR (Indian Rupee), and USD/NGN (Nigerian Naira) can represent a significant earning opportunity, as they allow trading in contexts with completely different characteristics from those of major pairs (which involve the US dollar) and minor pairs (which involve other strong currencies, such as EUR/GBP and AUD/CAD).

In this article, we will explore the advantages that trading exotic currencies can offer and the main risks involved in operating in emerging market economies. Additionally, we will see how STIC Cashback, with its periodic Forex rebate programme, can help offset transaction costs on exotic pairs and improve the overall P&L balance.

Comparison of Forex Spreads: Discover the Advantages of Exotic Trading

Even from a preliminary comparison of the Forex spreads of exotic pairs with those of traditionally stronger currency pairs, it is clear that the former are characterised by more limited liquidity and more pronounced volatility: the spread between currencies such as USD/INR or USD/NGN can easily exceed 20-30 pips, whereas in the euro/dollar exchange, the spread is often contained within 1 or 2 pips.

This fundamentally entails two consequences: greater earning opportunities, but also greater unpredictability in price trends.

One of the advantages of trading exotic pairs lies in the fact that, due to low liquidity and high volatility, market directional movements are often more decisive and consistent. An experienced investor can thus implement an advanced trading strategy to follow trends more stably than in more traditional markets.

However, be mindful of the risks. The fact that exotic pairs are tied to emerging market economies also means operating in a potentially more unstable scenario, where geopolitical and macroeconomic events (economic crises, coups, etc.) can suddenly reshuffle the deck.

Furthermore, institutional decisions and monetary control measures, such as changes in interest rates set by central banks, must be closely monitored to seize opportunities as they arise or, conversely, to abandon positions that could suddenly result in losses.

Moreover, trading currencies of states other than those usually considered exposes the trader to the possibility of sudden government changes, shifting policies, and, above all, a certain lack of communication, with information that may be less transparent than in economically more stable countries.

Trading Exotic Currency Pairs: What Are the Advantages?

In practice, the characteristics of markets with exotic pairs suggest effective strategies for experienced traders, such as carry trading. This involves borrowing a traditionally strong currency from countries with low interest rates to finance the purchase of high-yield exotic currencies, also taking advantage of the time lag between the opening of market sessions in different countries (i.e., operating overnight). One aspect to consider here is that overnight operations often involve significant commission costs due to the extended time positions being held open.

Additionally, trading exotic currencies allows one to break free from the dynamics common to exchanges dependent on the most commonly used currencies (e.g., central bank decisions on currencies such as USD, EUR, GBP, JPY, AUD...). This helps the investor diversify their portfolio and gain an edge over other traders, acting as a buffer in case of macroeconomic events that negatively impact major and minor currency pairs.

Mitigate the Risks of Exotic Trading with STIC Cashback’s Forex Refunds

Ultimately, exotic trading offers excellent speculative opportunities, allowing those who choose well-calibrated leverage and follow profitable strategies, such as directional trading (confirming positions after breaking key levels) and scalping, to achieve extra profits.

The latter tactic enables traders to capitalise on even the smallest price variations and is best implemented during high-liquidity market sessions, possibly by choosing an ECN Forex broker. In exchange for higher commissions, such brokers provide access to a network of liquidity providers (banks, institutions) for real-time trading on variable spreads.

On the other hand, as we have seen, the risks are numerous, primarily tied to the extreme volatility of Forex markets for exotic pairs. Additional risks stem from macroeconomic factors (such as institutional instability or shifting monetary policies) and technical issues, like the danger of slippage in order management, where the speed of ticket execution is critical.

Therefore, the advice for experienced traders is not to be deterred by these risks but to proceed with due caution, adopting rigorous risk management and avoiding the temptation of overly aggressive leverage.

Among the recommended tools for venturing into exotic pair trading, the first is an up-to-date trading journal to record past operations and outline a detailed trading plan.

The use of macroeconomic calendars is also essential to determine the most profitable times to trade across various markets, depending on opening hours and relevant time zones.

Lastly, a Forex rebate programme like STIC Cashback can assist traders in maintaining prudent risk management, providing an extra income stream that complements the profits from winning positions.

Registering with STIC Cashback ensures periodic refunds, typically weekly, proportional to the trading volume. This means that, especially with an advanced strategy like scalping, which involves placing numerous positions per market session, the potential to boost your budget with exotic pairs increases. A substantial refund is added to the profits earned, helping traders plan their next moves with greater confidence and peace of mind.

Try STIC Cashback today and discover how a periodic Forex cashback can significantly aid in managing risk when trading exotic currency pairs, paving the way to a new, promising source of income.