Whether to trade exotic currencies
Forex market focuses on major currencies. This is for simple and understandable reasons: high liquidity, relatively low volatility, protection from local crisis events. However, each of us tracks to some extent at least one exotic currency in which the money of our own country is nominated.
In today 's material we will deal with the advantages and disadvantages of trading exotic instruments.
The name "exotic pairs" includes an extensive definition of low-spread low-liquid national currencies paired with the dollar or euro. They may belong to European States (Norway, Denmark, etc.) or large Asian countries (Hong Kong dollar, rupee, Korean vona), but they are mainly the currencies of developing countries with low levels of contribution to the world economy.
A simpler definition of exotic pairs is any pair that goes beyond 28 combinations of 8 major currencies.
Why do traders trade exotic currencies?
The most common reason for trading "exotic" is home currencies. Each of us knows the "diseases" of the currency of our own state, hedges inflation risks, protects revenues.
The largest influx of traders into exotic currencies is observed when a country experiences a local economic crisis. Problems do not disappear in one day, volatility and short-term weakening against the dollar and the euro gives speculators the possibility of "currency hype."
Such earnings last until the moment of emergency measures by the local Central Bank, which can lead to a strong rebound at the most unpredictable moment. Hype risk justifies minimal investment, high shoulder and potential earnings as pips 3000-4000 a very short period.
The following strategies can be used for continuous trading on exotics:
Carrie trade on the local currency exchange;
If a trader has access to loans in dollars or euros at a low interest rate, he can convert them into local currency by placing a deposit on the stock exchange and buying national government bonds. These are liquid papers, they are accepted by the broker in the set-off of margin security, which allows the trader not to spend on opening a long position on the dollar futures.
Currency derivatives "protect" credit funds from depreciation in case of unexpected fall in the value of the national currency. Interest on foreign exchange credit may be several times less than the rate of the national Central Bank - this difference will be guaranteed and almost risk-free earnings of the trader.
Trade in the currency corridor or oriented mode;
In most "exotic" have a so-called special exchange rate regime. The National Central Bank is obliged to observe a strict link to one currency or basket of major currencies (majors). The IMF assumes that the local regulator may hold the course not in a specific linear dependence, but in a corridor whose parameters are public information.
The strategy of traders trading in "corridor exotic" is quite simple - buying a national currency on the lower border or selling on the upper border with the aim to "pick up" the bounce. The corridor can be recalculated and enlarged, so a short-term strategy is used.
The oriented regime means that the Central Bank is obliged to link the exchange rate of the national currency one to one with the euro, the US dollar or other "anchor" main currencies. This is impossible in daily trading on the stock exchange, which gives traders the opportunity to catch deviations from the currency constant from above and from below.