The currency market is the largest trading platform in the world, with more than four trillion dollars in value exchanging hands every single day. This also makes it the most liquid market, which has great appeal to day traders. Within the wider currency market there are several options for traders, each of which is affected by different market forces.
While most people have some awareness of the trading of major currencies simply through exchanging their holiday money, the exotic currency market is much more complex and presents unique challenges and potential rewards. Industry experts such as Lenn Mayhew Lewis have developed their knowledge over many years. In the PDF attachment you can learn more about how a currency comes to be classified as exotic and what that means in terms of trading.
Trading Risks for Exotic Currencies
The exotic currency market is not suitable for all traders as there are certain risks that are dissimilar to those that most traders will be used to addressing. The market is highly volatile and therefore traders need to have a high tolerance for risk, as well as the time and ability to fully understand the markets. Low liquidity and strict controls mean that trading exotic currencies is often far more complex than trading major currencies. However, high leverage means that the right trades can generate high profits. The short video attachment explains the use of leverage in trading.
As with all currencies, exotics are traded in pairs, but these pairs may be cross pairs, meaning the base could be any one of a number of currencies. Traders cannot assume the currency they want to get involved with is paired with a major currency such as the US dollar. This means that trading in exotics requires the trader to evaluate situations in more than one country at a time, researching conditions and interest rates in both sides of the pair. In the infographic attachment you can find some examples of volatility in the global currency markets, with representative data extracted from a single day’s trading.
Adjusting Classical Trading Strategies
Due to the niche nature of the market and the small – although increasing – pool of information that is widely available, traders in exotic currencies must be prepared to adjust their classical trading strategies in order to address the challenges of the market. Innovative methods of analysis may need to be brought into play and new or adapted strategies tested and utilised in order to take advantage of the potential benefits of this market.
More information is becoming widely available about several exotic currencies, such as the Russian rouble, but traders can still expect to have to spend more time researching in-depth. Traders who have a background in at least one country of a trading pair can be seen to be at an advantage, as they have the relevant local knowledge to add weight to their trading decisions.
Traders researching factors that affect the exotic currency market often look at correlations to the country’s currency to see how they are performing and use that information to make educated judgements about how the currency will perform. For example, traders looking at the rand in South Africa may wish to look at the performance of the gold markets, while traders in the Russian rouble will be more interested in how oil prices are moving.