Maximising opportunities with exotic currency pairs: Octa broker’s expert tips

Adding exotic currency pairs to a portfolio is a popular way to get
exposed to a wider variety of assets. These pairs, which include currencies
from emerging markets or smaller economies, offer unique opportunities due to
their volatility and potential for high returns. For traders in regions like
India and Southeast Asia, exotic pairs can serve as valuable tools for
diversification, potentially increasing returns from trading. Octa Broker, a
broker with globally recognised licences, explains the basics of exotic pairs
and provides tips on how to navigate such a dynamic landscape, where
understanding volatility and managing risk is paramount.

Key characteristics of exotic
currency pairs

Exotic currency pairs differ from major and cross pairs in several ways,
each presenting opportunities as well as challenges for traders.

Higher spreads and lower liquidity

Exotic pairs tend to have wider spreads due to lower trading volumes and
reduced liquidity. For instance, the USD/ZAR pair frequently experiences a
spread of 100 pips or more, driven by its less active market presence. This
wide spread is a broker’s commission for facilitating trades in less liquid
markets, and it requires traders to account for this in their profit
calculations to avoid unanticipated losses.

Volatility and economic sensitivity

Some exotic pairs exhibit strong trending behaviour, with notable
examples like the USD/MXN (U.S. Dollar / Mexican Peso) pair. The USD/MXN pair
often responds dynamically to economic factors, particularly commodity prices.
As Mexico is a major oil exporter, fluctuations in oil prices can significantly
impact the Peso’s value against the dollar.

While exotic currency pairs present exciting opportunities, a deep
understanding of market drivers is essential when handling them. Traders must
keep track of both local economic conditions and global trends to make informed
decisions.

Kar Yong Ang, a financial market analyst at Octa broker, provides a
glimpse into factors affecting the USD/MXN pair: ‘Currently, Mexico is experiencing a trade deficit, indicating that its
imports exceed exports, which can place downward pressure on the peso and
contribute to its weakening. Additionally, market participants are cautious
about a potential U.S. recession, leading to an increased demand for the dollar
as a safe-haven asset.’ This scenario demonstrates how closely linked
economic developments are to the performance of exotic currency pairs,
underscoring the importance of staying informed on both local and international
factors when trading these pairs.

Strategies for trading exotic
currency pairs

Exotic pairs demand a solid grasp of market conditions and robust risk
management strategies. For beginners, using a smaller portion of their capital
and setting realistic profit goals is essential. For example, they might start
by trading small lot sizes in USD/ZAR and adjusting their stop-loss orders to
manage risk in the face of potential large price movements. Here’s an example
of fundamental and technical analysis a trader can make before opening a deal.

USD/ZAR (U.S. Dollar / South African Rand)

The USD/ZAR pair is influenced by South Africa’s economic conditions,
political stability, and the fluctuating value of its key export, gold. With
South Africa being a major gold producer, the currency often correlates with
gold and platinum prices. When gold prices rise, the Rand typically
strengthens, creating opportunities for traders who monitor commodity price
movements closely.

Suppose a trader uses the Bollinger Bands indicator to identify buying
and take-profit opportunities on USD/ZAR. Entering at 18.00 ZAR and exiting
when it hits 18.80 ZAR, the trader secures an 8,000-pip profit, accounting for
the 773-pip spread: the 8,000-pip difference excludes the spread. Normally, the
spread is less than 100 pips, so the profit is secured. However, even in
exceptional cases when the spread is higher, a trader can still seal a
successful deal. This scenario highlights both the potential for profit and the
importance of factoring in spread and volatility in trading strategies.

Advantages and risks of trading
exotic currency pairs

Benefits of diversification

Adding exotic pairs to a portfolio can diversify risk due to the low
correlation of these pairs with traditional assets like stocks and bonds, as
well as major currency pairs. Since the exotic pairs include a popular currency
and the one from a developing country, the determining factors that affect the
price significantly differ from those impacting major pairs. This allows for a
different set of trading opportunities.

Risks to consider

The high volatility and wide spreads of exotic pairs mean that traders
must exercise caution. Without proper risk assessment, trading exotics can lead
to significant losses. Monitoring local economic indicators and staying
informed about global events are crucial for traders who wish to navigate these
challenges successfully.

About Octa

Exotic currency pairs offer intriguing opportunities for traders looking
to explore beyond conventional assets. With their high volatility, unique
correlation patterns, and sensitivity to both local and global factors, exotics
provide an alternative avenue for diversification. By staying informed and
applying sound strategies, traders can leverage the potential of exotic pairs
while mitigating the associated risks.

Octa is
an international broker that has been providing online trading services
worldwide since 2011. It offers commission-free access to financial markets and
a variety of services used by clients from 180 countries who have opened more
than 52 million trading accounts. To help its clients reach their investment
goals, Octa offers free educational webinars, articles, and analytical tools.

The
company is involved in a comprehensive network of charitable and humanitarian
initiatives, including the improvement of educational infrastructure and
short-notice relief projects supporting local communities.

Since
its foundation, Octa has won more than 70 awards, including the ‘Best Forex
Broker 2023’ award from AllForexRating and the ‘Best Mobile Trading Platform
2024’ award from Global Brand Magazine.

This article was written by FL Contributors at www.forexlive.com.