The Forex market is the largest OTC market in the world, according to some estimates it moves almost 5 trillion dollars a day. Specifically, in the last triennial survey of the BIS, you can observe the level of negotiation and distribution among the main currency pairs that are traded in that market. This tells us clearly why it is the largest market in the world. But the fact is that not all the instruments that are traded in this market are the same. Each pair has its own characteristics and advantages and disadvantages.
Within this market there are numerous currency pairs that are classified into three types:
- Major currency pairs
- Minor currency pairs
- Exotic currency pairs
In this article we will give an approach to which currencies are considered exotic currencies and what opportunities and risks they offer to the trader that decides to trade with them.
What are exotic currencies?
This term is used with those currency pairs that meet certain characteristics of liquidity, trading volume and availability of their currencies. It is not a static concept but it varies depending on the economic and geopolitical level of the country, as well as its development. Exotic currency pairs are usually associated with the currencies of developing economies or expanding economies.
The exotic term does not imply that the currency is not strong or that the economy of the country is not safe but that the exchange volume in the Forex market is still low.
Types of exotic currencies
Depending on the degree of convertibility of these currencies, they are classified as:
- Fully convertible: are those currencies that can be traded without any limitations
- Partially convertible: they are currencies that are traded in a low volume and a part of their negotiation is controlled by the issuing state of the currency.
- Non-convertible: those currencies that are not traded in the international Forex market due to the high dependence of the country’s economy on the stability of the currency.
A summary of the exotic currencies would be the following:
Most popular exotic currencies
|United Arab Emirates Dirham||AED|
|Hong Kong Dollar||HKD|
|South Korean Won||KWR|
|South African Rand||ZAR|
Risks and opportunities of exotic currency pairs
The main trading risks are associated with the lack of liquidity of these pairs:
- High volatility
- Elevated spreads
- Little Liquidity
- Difficult interpretation of macroeconomic data and its impact on the selected pair
For example, we can observe the differences in spreads that exist between the offer of major currency pairs and the exotic currency pairs offered by RoboForex. Due to this, the market entries that we make in this type of currencies must be very controlled because the high volatility of these markets plus the high trading costs due to the spreads, makes these transactions risky. In these markets it costs more to obtain benefits.
We must also take into account the characteristics of the intermediary (ECN or Market Maker) and the supply of foreign currency pairs that are available. In the case of RoboForex, you can access more than 30 pairs of this type.