Exotic Forex Pairs - Not Quite Exciting

The Forex market can be appealing for several reasons to the average trader. For some, it is the leverage that can be applied to your positions. For others, it is the fact that you only have to pay attention to a handful of currencies in order to be involved. This certainly is an advantage of trading currencies as there are literally thousands of stocks available in New York alone. But for some traders, it is the "?exotic" nature of trading currency pairs that is truly attractive.

Exotic Forex PairsThe last sentence in the above paragraph was the kind of person I was when I entered the Forex arena. I always considered myself a "?worldly" person, and as such thought it only natural that I should trade an international market. I even ran out and got signed up with a broker that offered over 100 currency pairs because someone like me would need that!

What I found though, is quite different than what I had imagined. There is no real "?sexiness" to trading the exotic currencies, and truth be known, it only causes heartbreak for the average small retail trader. The fact is that the currencies aren't trading heavily, and as such tend to move very erratically.

This can pose a serious issue for the beginner who is simply not used to trading fast moving markets, and an illiquid one isn't any place for them to be messing about in. When I started, my first trade was in the South African Rand against the US Dollar. Since this market isn't traded very heavily, it tends to act in a schizophrenic manner at times. Let's just say it was an experience I will never forget.

One of the biggest arguments against trading the exotic currency pairs is the spread. While you should only be paying about 2 pips in a pair like the EUR/USD, you might find yourself paying a spread of 50, 100, or even 200 pips in other pairs that are less liquid like the USD/MXN, CZK/JPY, or even the AUD/MXN. When you start out being down 100 pips, it makes placing a profitable trade a real challenge. These markets have their place, but only if you are in a situation like being a Hungarian construction firm needing to buy machinery from Japan (HUF/JPY). In other words, only players that absolutely have to be in these markets tend to show up.

While not trading the "?exotics" might take some of the excitement out of Forex trading, the truth is that you aren't trading them anyway! You are speculating on the perceived value of one currency to another, not taking delivery of the Hungarian Forint as an example. Whatever your profits turn out to be, it will be credited as Dollars, Pounds, Euros, or whatever base currency you trade out of anyway. So when you think about it, there is nothing special about "?owning" the Forint anyway.

DailyForex.com Team
The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.