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Currency trading divides world currencies into three individual markets – major, minor and exotic.   Major currencies are those that are traded frequently and at high volumes, such as the euro, US dollar or British pound. The short video attachment gives an overview of the definition of exotic currencies.

Trading in exotic currencies is very different from trading in major currencies, with different factors affecting the markets – something that experts such as Lenn Mayhew Lewis can confirm. Just because a currency is defined as exotic does not necessarily mean it has a low value. Exotic refers to the trading volume rather than the value, with currencies such as the Saudi Arabian riyal and the Kuwaiti dinar as examples of highly valued currencies that are defined as exotic due to the low volumes of trade within the markets. There are both risks and rewards to trading in exotic currencies, with a variety of investment options available.

Exotic Currency Trading Rewards

The main reward to trading in exotic currencies is the huge potential for profit in both the short and long term for those traders who accurately predict which way the market is going to move. As an example of the short term potential, traders who were on the right side of the market for Russian roubles to US dollars between July and September 2014 benefited from a wide swing due to the Ukrainian conflict, with the value changing in just two and a half months from 33.5 roubles to the dollar to 39, representing a profit of 16.5%, or possibly even more if the traders used leverage.

An example of exciting long term profits for exotic currency traders in recent years would be Indian rupees to US dollars between 2008 to the middle of 2013. In that period, the exchange rate for rupees to dollars increased from approximately 39 to 69, representing profits of 77% for those traders who backed the winning horse. However, these wide market swings naturally carry increased risk for traders who are not able to anticipate which direction the market is going.

Exotic Currency Trading Risks

High fluctuations in the market means that exotic currency trading can be difficult even for those traders with a wealth of forex market experience. You can learn more about forex trading in the PDF attachment to this post.

In both the examples above, while the potential profit from being on the right side of the fluctuation is enormous, the risks are also high and it is extremely difficult for traders to predict which way the wind will blow. [3]

Low market liquidity is another risk of exotic currency trading, meaning it can be difficult to find a buyer or seller at the appropriate time. With fewer people and institutions involved in exotic currency trading, often the only option is to trade at banks with fixed remittance at pre-determined rates.

The profit potential for forex trading in exotic currencies can often be eroded by the relatively high mark-up fees dealers charge, even where historical data analysis suggests that price variations indicate highly profitable opportunities.

Lack of local market awareness is another stumbling block many forex traders hit when dabbling in exotic currencies. Macroeconomic factors such as differentials in interest rates and purchasing power parity are tricky to track in distant countries, leading to a lack of awareness that in turn leads to higher risk.

The infographic attachment offers a few tips for trading in exotic currency pairs.