Exotic Currencies Trading

In Forex trading, there are many currencies one could choose to trade. Usually the typical currencies chosen are the Euro, Dollar (Australian, Canadian, and American), Yen, Swiss franc, and Sterling, but there is also the option of trading exotic currencies as they offer great opportunity for profits but that comes hand in hand with the substantial risk of loss.

An exotic currency is not usually the first choice for trading on the Forex market as people are unfamiliar with them, they are usually illiquid and therefore have little volume traded, have high cost of carry and therefore a high cost of interest paid on a margin account and of holding a currency position; come from from emerging markets or developing countries such as Africa, Middle East, and Asia which usually means that their political, economic, and financial environment can change quickly; and usually experience volatile trade with wide spreads. In general for these reasons exotic currencies are not easy to trade or manage risk but profit potential can be quite large.

Another characteristic of an exotic currency is that the spread can be five times as wide as the more common and secure currencies mentioned above. A spread is defined as “the difference between the bid price and asked price for currency.” Wide spreads combined with the illiquidity and lack of security makes for an increase in volatility, which increases risk but also rewards.

Trading exotic currencies is not for everyone as it carries high risks and be very expensive. Those who trade exotic currencies look for opportunities to take advantage of politically and economically fragile countries.

Some of the many more popular exotic currencies include: Chilean Peso, Hong Kong Dollar, Icelandic Krona, Philippine Peso, Thai Baht, South African Rand, Indian Rupee, Mexican Peso, Egyptian Pound, Taiwanese Dollar, United Arab Emirates Dirham, South Korean Won, Kuwait Dinar, Saudi Arabian Riyal, New Turkish Lira, Brazilian Real etc.

What every currency you decide to trade, or want to make available for trade on your Forex website, make sure you have fully understood all risks and legalities involved.