Strategies for Trading Exotic Currency Pairs

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Strategies for Trading Exotic Currency Pairs

Exotic currency pairs offer unique opportunities in forex trading, combining major currencies with those from emerging or smaller economies. While they may be less frequently traded than major or minor pairs, their higher volatility can lead to significant price swings. This article delves into exotic currency pairs and trading strategies for speculating on these volatile price movements.

Understanding Exotic Currency Pairs
In the forex market, pairs are categorised into three types: major, minor, and exotic currency pairs. Exotic forex pairs typically involve one major currency paired with the currency of an emerging or a strong but smaller economy. They are less frequently traded compared to major or minor pairs, leading to higher volatility and potentially larger price swings. An exotic currency example is the pairing of the US Dollar (USD) with the Turkish Lira (TRY).

These pairs often exhibit unique market dynamics. For instance, political events, economic developments, or changes in commodity prices can significantly influence exotic pairs due to their local market sensitivities. This aspect can lead to both opportunities and risks for traders.

Exotic pairs tend to have wider spreads, reflecting their lower liquidity and higher transaction costs. However, for informed traders who understand these markets, exotics can offer exciting diversification opportunities. Traders should also be aware that exotic pairs may require more extensive monitoring due to their potential for rapid and unexpected price changes.

Best Exotic Forex Pairs to Trade
Exotic forex pairs are known for their volatility, offering traders opportunities for potential gains, albeit with higher risk. Among the most volatile exotic currency pairs, some stand out for their trading potential:

• USD/HUF (US Dollar/Hungarian Forint)
  
• EUR/NOK (Euro/Norwegian Krone)
  
• USD/SEK (US Dollar/Swedish Krona)
  
• GBP/SGD (British Pound/Singapore Dollar)
  
• USD/MXN (US Dollar/Mexican Peso)
  

These pairs exhibit dynamic price movements, making them attractive for traders who can navigate their complexity and manage the associated risks effectively.

Below, we’ll discuss three exotic pair trading strategies. To gain the best understanding of how they work, consider following along in FXOpen’s free TickTrader platform.

Strategy 1: Bollinger Band Reversals With Parabolic SAR Confirmation


This strategy combines Bollinger Bands and the Parabolic SAR to identify potential reversal points in exotic currency pairs. Bollinger Bands provide a visual representation of market volatility and price levels, while the Parabolic SAR helps confirm trend reversals.

Entry

• Traders look for the price to react from the upper or lower Bollinger Band.
  
• The key is to observe the Parabolic SAR for confirmation of reversal within three candles, including the one touching the band. For instance, if the price touches the upper band, it's considered a potential sell signal if the Parabolic SAR switches and plots a dot above the candle, indicating a downtrend. For a potential buy signal, the price touches the lower band while Parabolic SAR plots a dot below the candle.
  

Stop Loss

• Traders might place stop losses just beyond the Bollinger Band from where the price reacted or the reaction candle itself.
  

Take Profit

• Profits may be taken at the opposing Bollinger Band.
  
• Alternatively, traders may close the trade when the Parabolic SAR indicates a trend reversal in the opposite direction.
  

This strategy leverages the volatility of exotic pairs, with Bollinger Bands providing dynamic support and resistance levels, while the Parabolic SAR offers timely signals for trend reversals.

Strategy 2: Heikin Ashi Trends With MACD


This strategy integrates Heikin Ashi candles with the Moving Average Convergence Divergence (MACD) to identify trend directions and strength in exotic forex pairs.

Entry

• After a colour switch in Heikin Ashi candles, traders typically wait for three consecutive candles of the same colour to form.
  
• The next step involves looking for a MACD signal line crossover, preferably in the direction of the current trend. This crossover post the Heikin Ashi colour change serves as a confirmation for the entry.
  

Stop Loss

• Stop losses may be placed beyond a nearby swing point. This placement provides a buffer against minor price fluctuations while still maintaining a reasonable risk level.
  

Take Profit

• Traders may take profits after observing three candles of the opposite colour.
  
• The theory states that traders exit the trade following a MACD crossover in the opposite direction.
  
• Alternatively, a suitable support or resistance level might also be used as a target for taking profits.
  

Heikin Ashi candles smooth out price movements, making it easier to identify trends. When combined with MACD, a powerful tool for revealing momentum and confirming changes in the price direction, this strategy becomes effective in dealing with the trends and reversals common in exotic currency pairs.

Strategy 3: Keltner Channel Breakout Using VWAP


In this strategy, traders use Keltner Channel and Volume Weighted Average Price (VWAP) indicators on short-term charts (1 to 5 minutes) to capture swift movements in exotic currency pairs.

Entry

• Traders typically focus on the VWAP to determine the market trend: long positions when the price is above the VWAP and short positions when below.
  
• The Keltner Channel, set with a multiplier of either 1 or 2, helps identify breakout opportunities. A multiplier of 2 is often preferred for reducing false signals, though 1 can provide quicker entries.
  
• Entry may be considered when the price breaks out of the Keltner Channel and retests the middle line, aligning with the trend indicated by the VWAP.
  

Stop Loss

• Stop losses might be placed either beyond a nearby swing point or beyond the Keltner Channel or VWAP. This strategy may help in managing risk while allowing some room for price fluctuations.
  

Take Profit

• Profits may be taken at a suitable support or resistance level.
  
• Another strategy may be to exit the trade if the price crosses the other side of the Keltner Channel.
  

This strategy leverages the Keltner Channel to identify potential breakouts and retests, while the VWAP provides an additional layer of trend confirmation. The combination is particularly effective in short-term trading scenarios, making it a valuable approach for those trading volatile exotic pairs.

The Bottom Line
Trading exotic currency pairs requires careful strategy and an understanding of their unique dynamics. By applying the methods outlined, traders can potentially navigate these volatile markets with greater confidence. To explore these opportunities, consider opening an FXOpen account. We offer access to a range of exotic pairs and the tools necessary to navigate their volatility in our native TickTrader platform.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.