What are forex pairs in trading?
Exotic currency pairs are characterized by the pairing of two thinly traded currencies, making them less commonly exchanged in the market. Examples of such pairs include KES/TRY (Kenya shilling vs Turkish lira) or BRL/ZAR (Brazilian real vs South African rand), where trading activity is relatively limited on any given day. Typically, exotic currency pairs involve currencies from emerging markets, which are countries yet to attain developed status. These emerging market currencies hail from nations such as Turkey, South Africa, China, Singapore, and Brazil, among others. It’s noteworthy that exotic pairs can also comprise combinations of developed and emerging market currencies. Outlined below are some prominent exotic currency pairs:
EUR/TRY (Euro vs Turkish lira)
SGD/ZAR (Singapore dollar vs South African rand)
EUR/ZAR (Euro vs South African rand)
GBP/RUB (British pound vs Russian ruble)
EUR/MXN (Euro vs Mexican peso)
MXN/ZAR (Mexican peso vs South African rand)
BRL/TRY (Brazilian real vs Turkish lira)
SGD/MXN (Singapore dollar vs Mexican peso)
CNH/RUB (Chinese yuan vs Russian ruble)
Traders should approach exotic currency pairs with caution due to their lower liquidity and potential for higher volatility. The unique characteristics of these pairings make them a niche choice for those seeking diversification in their currency trading strategies.
Distinguishing Exotic Currencies from Majors and Minors
Exotic currency pairs stand apart from the two primary categories of currency pairs: majors and minors. Forex majors consist of two currencies from developed nations such as the US, Australia, and New Zealand. These pairs, including the EUR/USD, GBP/USD, and USD/CHF, are characterized by high liquidity and relatively lower trading costs due to narrow spreads. A key feature of forex majors is their requirement to include the USD as either the base or quote currency. This stipulation contributes to their heightened liquidity and tighter spreads. Additionally, major currency pairs boast significantly larger trading volumes and are universally offered by all forex brokers. On the other hand, minors represent the second main type of currency pairs. Minor currency pairs involve two moderately traded currencies and exclude the US dollar. Examples of popular forex minors include the EUR/GBP, AUD/NZD, AUD/GBP, EUR/JPY, and GBP/SEK.
Minor currency pairs share several characteristics, including higher trading volumes compared to exotic pairs, and are commonly offered by numerous brokers. While not as liquid as majors, minors present viable trading opportunities and are suitable for investors seeking diversification beyond the major currency pairs.
Characteristics of Exotic Currency Pairs
Exotic currency pairs exhibit several distinctive characteristics, including:
- Thin Trading: Exotic pairs are thinly traded as most traders gravitate towards more liquid options in the market.
- Wider Spreads: The spread, representing the difference between the ask and bid prices of a pair, tends to be wider for exotics, resulting in higher trading costs.
- Limited Broker Availability: Due to their thin trading volumes, not all brokers offer exotic currency pairs.
- Low Trading Volumes: Exotic pairs often experience extremely low trading volumes compared to more popular counterparts.
- Limited Timely News: Obtaining the latest crucial news related to these pairs can be challenging at times due to their relatively lower market visibility.
Despite the challenges, there are advantages to trading exotic currency pairs. Some traders specialize in these pairs, capitalizing on their unique movements to generate significant profits. Additionally, the lesser focus on exotics means hidden opportunities may exist, allowing traders to achieve uncorrelated returns.
Risks Associated with Exotic Forex Pairs
- Highly Risky: Exotic pairs are considered extremely risky and are generally recommended only for highly experienced traders with substantial industry knowledge.
- Costly to Trade: Trading exotic pairs is more expensive due to wider spreads, and converting account currencies can incur additional costs.
- High Volatility: Exotic pairs tend to be highly volatile, driven by factors like the lack of central bank independence or high national debt in the involved countries.
- Illiquidity: Exotic currencies are highly illiquid, attributed to the limited number of specialized traders and small trade volumes between the countries. This illiquidity results in higher trading costs.
In summary, while exotic currency pairs offer unique opportunities for those well-versed in their intricacies, they come with heightened risks, increased trading costs, and volatility. Traders should exercise caution and consider their risk tolerance and expertise before delving into the world of exotic pairs.