This question is particularly important for anyone who insists on trading anything but the major currency pairs. First of all, and perhaps most importantly, did you know that Vietnam’s currency is called the Dong? That is too good to be true. For simplicity’s sake and in case you do not yet trust me here’s a chart of the Dong:
What are Exotic Currencies?
That being said, for those of you who are unsure exactly what constitutes exotic currencies, they are often the ones you never hear about. No one talks about them because they tend to move a lot more, can be more susceptible to change and most likely scares many traders. However I have a secret for you…exotic currencies shouldn’t scare you. On the contrary, exotic currencies, or exotics tend offer some of the best opportunities in foreign exchange (FX).
Don’t believe me? Well here are three reasons you should consider adding an exotic currency pair to your watchlist:
1) They are “technically obedient”. What does this mean? This means that if there is a breakout from support or resistance, it’s for real, and you can use the next level of support or resistance for a very high probability target. This regularly is not the case with the majors, which are held hostage by a number of other market forces.
2) They MOVE. As I alluded to above, exotic currencies trend to move a lot, which scare people. However, nobody ever made profits with a stagnated currency pair. For example, if the Turkish Lira gives you a trade, it’s going to get down and boogey. It’s not going to move 10 pips and then stop and reverse.
One important note to make, an exotic currency pair could move 2,000 pips and then stop, stone cold. Why? Because only a small number of banks trade these exotics, so once a move starts, it continues and rumbles along, and once it’s over, there isn’t any other trader out there to reverse it. Coming back to our example of the Vietnamese dong, this is why you get savage trends like those seen in the chart above.
…exotic currencies shouldn’t scare you… exotics tend offer some of the best opportunities in foreign exchange…
3) Finally, trading exotics is FUN. Apart from the word exotic, which is sure to elicit some vision of a beach in Thailand or palm trees in some picturesque cove, exotic currencies help cut through the monotony of an otherwise moribund trade. As a corollary, trading should not be about excitement, however why not enjoy what you are doing, especially if this is your job, career, or in some cases life? Truthfully, it is much more fun to tell the cashier at the grocery store that you “trade the dong” than it is to say, “I trade forex.”
Another question entirely, and perhaps best fit for a future topic of discussion, is what kinds of strategies work for exotic pairs? Presently, I’ve got one that I use utilize a few times a week. I’ll share it with you right now, as long as you promise to stay in touch (see the end of this article), and because you caught me in a jubilant mood.
Exotic Currency Trading Strategy
Thus, here’s a simple system for trading an exotic currency pair - in this case, the American dollar vs. the Mexican Peso (USD/MXN). As a side note, do you know why I adore this currency pair (I call it the Taco, by the way)? Because if there is a short-term breakout on the pair, it’s usually good for a nice little run. Again, think MOVES. Here’s an example:
In the morning, around 8:00 Eastern US Time, I draw trend lines on the chart. I also draw basic horizontal support and resistance. For this, I use the 15-minute chart.
Then I wait for a breakout. If it breaks out above resistance or below support, I take a trade in the direction of the breakout. When should you stop, or a better question is when should you stop? Quite simply, I then hold the trade until it reaches the next level of support or resistance.
If the trajectory of the currency pair reverses (which is uncommon), I don’t hold the losing trade. Instead, I exit with a loss if it closes back inside the broken support or resistance. Simple. Easy. Bada-boom, bada-bing. Don’t try and be a hero.
If you’re not familiar with supports or resistances, just go to YouTube. There are twelve bajillion free videos about it or some word that the English language has not even caught up with that denotes an extremely large number.
Ipso facto, that’s it - that’s the entire system.
I’d love to hear from you if you read the article and you’re going to give exotics a try. You can text me anytime to 304-281-8332, and you can use WhatsApp if you live outside the United States.