Risk and Forex Trading Profile Exotic Pair
Trading exotic forex pair provides its own risk. Low liquidity factor and limitations of trading in the country became a major factor in the lack of popularity of exotic pairs.
In spite of speculation, forex prices are fundamentally determined by demand and supply trends following “Purchasing Power Parity” and due to interest rate differentials. It would be very difficult to track and predict developments on macroeconomic factors such as for exotic pair countries.
Low liquidity makes exotic forex trading more difficult. Most transactions occur in banks with fixed interest rates that have been determined for remittances or similar activities.
Analysis of daily historical data for all exotic pairs will show a favorable opportunity both in terms of price variations seen during short, medium and long periods. However, the high cost of mark-ups imposed by forex brokers can erode the potential for profits.
In some cases where there is political uncertainty in the home country of the currency, this causes high fluctuations, making it difficult for even experienced traders to trade in exotic pairs.
Apart from directly buying the desired currency, there are several other investment options to benefit from the exotic currency. Some of the available futures forex contracts, forex options and even option variants on the currency are available as OTC products in the market. Each individual must remember the complex nature of this product, which further adds to the complexity of exotic trading pairs.
Novice traders, short-term and limited capital are not advised to trade in exotic pairs. Experienced liquidity providers and forex brokers who benefit from exotic trading pairs by utilizing high spreads, and sacrificing their customers.
Exotic forex trading can be a good investment for long term experienced investors, international investment managers or investors who are willing to add some diversification of their investments on a global level.
Ideally, an individual who has consistent action on a particular country (and a particular currency), with potential long-term investments, can try for exotic trading pair with a “set and forget” approach.