What To Expect When Trading Exotic Currencies
Statistics have shown that currency trading, or better known as forex trading (foreign currency exchange), is getting more and more buzz. If you didn’t know – currency trading is the most liquid market in the world. Trading exotic currency provides traders with a diverse way to make a profit. However, trading with exotic currencies definitely isn’t for everyone.
If this is your first time reading about exotic currencies, or if you’ve just briefly heard terms such as “exotic currency pairs”, all of this might sound a bit complicated. Rest assured, trading exotic currencies isn’t as hard or complicated as it might seem at first glance.
You might have heard of some horror stories about acquiring exotic currency and never being able to exchange it back. However, due to the internet, these are things of the past. With online currency exchanges, such as US First Exchange, buying and selling is made even easier, singlehandedly revolutionizing trading with exotic (and other) currencies.
Here, we are going to go over what an exotic currency actually is, how it works, and what you can expect when trading with these currencies.
Exotic Currencies: What They Are
If you’ve never come across the term “exotic currency”, you might find it a bit of an odd term. The simplest definition of exotic currency is that it’s a foreign currency that doesn’t have much liquidity. Western currencies, such as the American dollar, or the European euro are quite liquid, on the other hand.
Some might prefer the term “low-liquidity” currency rather than calling them “exotic”. However, it got branded as exotic since a lot of these currencies are used in developing countries. More western currencies are considered major currencies due to their liquidity and market depth.
Since exotic currencies lack market depth, thereby making them extremely volatile, most people consider trading exotic currency risky. The volatility of the exotic currency is also closely tied with the economic situation of the country where it’s primarily used.
Some of the most popular exotic currencies are: the Norwegian Krone, Hungarian Forint,
Polish Zloty, South African Rand, Iraqi dinar, Czech Koruna, Turkish Lira (a really popular exotic currency), Singaporean Dollar, Mexican Peso, Indonesian Rupiah, Hong Kong Dollar, South Korean Won, Brazilian Real, Russian Ruble, Indian Rupee, and the list goes on.
How to Acquire Exotic Currencies to Trade
There are different ways to acquire an exotic currency. The simplest way would surely be ordering the currency online and having it arrive at your door. Getting insurance for a shipment of exotic currency is an absolute must, meaning that you should always choose a company/business or online exchange that offers this.
You can also contact your bank and see if they hold the currency, and they might be able to manually convert your major currency into an exotic currency. Unfortunately, you might run into a few complications here since this isn’t always standard practice for banks. Another way to acquire exotic currency is to contact a broker, forex dealer, or travel agent.
Trading Exotic Currencies
What affects the exchange rate with exotic currency is a bit different than with major currencies. Some currencies that were considered weak, only grew weaker with time, while other currencies that were deemed weak at one point managed to “regain their strength”. The susception to trends and volatility are major factors, which can lead to unpleasant trades.
An important part of trading exotic currencies is knowing that you need to think about long-term benefits. If you are someone who has only dealt with major currencies, this might be a bit difficult at first. The faster that you adapt to the mindset of looking at long-term benefits, the less stressed you will be in the long run.
Truly “get to know” the exotic currency and its patterns before you nosedive into investing in it or trading with it. Forex traders often say that each currency has a “face”, a personality. Once you get to this point, you will start to notice certain regularities. After you feel more familiarized with it, trading with it becomes easier.
Exotic Trading Pairs
Most people who trade exotic currencies recommend trading the currency against the currency of a major trading pair. In most cases, if you are trading with the Euro, it’s best if you trade it with a currency that is present in Europe or at least, close to Europe. For other exotic currencies, it’s best traded against the US dollar. (Although this isn’t a rule in the world of currency.)
Here are some examples of popular trading pairs: Euro against the Turkish Lira (EUR/TRY), Japanese yen against the Norwegian krone (JPY/NOK), British pound against the South African rand (GBP/ZAR), the US dollar against the Hong Kong dollar (USD/HKD), and so on.
In the past couple of years, the Turkish Lira has been getting a lot of attention, even amongst traders who prefer dealing with major and minor currencies exclusively. Learning more about the Turkish Lira might be another good way to prepare yourself for what you can expect when trading exotic currency.
What You Can Expect
It was previously mentioned that the volatility of the exotic currency is often closely tied to the economic situation in the country of its primary use. This also means that it would be best if you knew about the economic and even political situation before you go all-in on an exotic currency.
If a country, whose currency you obtain and trade with, goes through a period of instability, you can already assume that that’s going to affect the exotic currency that you are dealing with. Because there have been examples in the past where an exotic currency has been deemed almost worthless, some traders shy away from exotic currencies.
Some also shy away because obtaining it isn’t the easiest thing due to the lack of liquidity. You can’t just walk into any bank or financial institution with a bunch of Iraqi dinars to your name and expect them to do something with it.
At times, you can expect moments of the (paradoxically) unexpected rise in value. However, you don’t want to hype yourself up and “see” things that aren’t happening in the currency market.
Oftentimes, forex traders recommend that you get accustomed to the history of the exotic currency that you are interested in before you even think of buying it. This would be a pretty sound piece of advice. The better you understand the history of the currency, the better you can predict or project what will happen with the currency.
The Potential Risk
When trading with exotic currencies, you come across different issues than if you were trading with major currencies. It is already pretty clear that there is a certain factor of unpredictability and instability when it comes to investing in or trading with exotic currencies.
Just like a stock can become completely worthless, the same thing can happen with currency. One of the other things that can happen is a big spread in the exchange rate. Essentially – the biggest risk is you losing the money that you invested. But that’s simply the gamble of engaging in investing and trading, isn’t it?
In the end, investments and trading can be quite risky. If you are already active in this area, you already know this very well. Trading with exotic currencies, in that sense, is no different. The risk is still there, as well as the opportunity to make some serious profit.
At first, it might seem like it’s not as directly profitable as, let’s say, trading with major and minor pairs. Sometimes it just takes more patience. Sometimes it takes the right moment. As was previously mentioned, exotic currencies are the currencies of emerging markets and developing countries. Meaning that it’s quite unpredictable.
This results in moments where the worth of a currency boosts up, moving up, at times even by 30%. Learning about trading exotic currency could bring you to a profit that you wouldn’t see if you were only trading major or minor currencies.
Trading Exotic Currencies is Not for Everyone
The idea of a government decision or a politician tanking your whole investment, as well as hours, days, or months of continuous research and work can be quite scary. This is why we say that trading exotic currencies aren’t for everyone. The unpredictability can be a big turn-off for traders, which is why some won’t recommend getting into trading exotic currencies.
If any of this is still slightly fuzzy, it’s recommended that you talk to a forex trader or someone who specializes in currencies, investing, and trading, and whom you trust. Presuming that you are not an absolute beginner with trading currencies – exotic currency might be your next new profitable thing.
However, if you don’t have a lot of experience with trading, you may want to focus on major and minor currencies first. Then, you will slowly get a grasp of how trading with exotic currencies could go. The more you know, the better you are prepared, and the more patient that you are – the better.
