There are a lot of FX traders focusing on exotic pairs during the summer, mainly because the daily ranges of the majors are dropping and thus the potential to find new trading opportunities. Their main focus shifts to exotic pairs, which are more volatile, but yet come with some downsides, at the same time. In case you are looking at trading exotic FX pairs, here are some of the pros and cons you need to be aware of.
High volatility
These currency pairs are more volatile and because of that, it may be possible that you need to adjust some of your risk management parameters. You should place larger stop losses and take profits, to keep the ration between them optimal, while not being stopped out each time volatility spikes. Also, you need to be aware that FX trading execution might change, and sometimes you’ll get into the market at a worse price. High volatility could be useful if handled professionally, but at the same time, it can create a lot of damage, when you are caught off guard.
Lower accuracy
Support and resistance levels, technical indicators, and most of the FX trading strategies will perform poorer with exotic pairs, mainly because liquidity is very thin. Since there isn’t enough order flow to reinforce all trading signals, your trading accuracy could be reduced by at least a few percentage points. In that case, you need to be more selective or adjust your risk management, so profitability won’t be dampened. Also, keep in mind that timing will play a major role.
Directional bias
If we look at emerging markets currencies, the underperformance against strong currencies like the US dollar and the Euro is obvious. This had created directional bias, which translated into a lot of with-trend opportunities for us, traders. The COVID-19 pandemic is not supporting flows into emerging economies, even though countries like the US are the hardest hit right now. However, we should pay attention to the big players and see where they perceive safety lies.
Diversification
Trading exotic pairs might be just another way to diversify your trading. In case for the past months, you’ve been focusing on just a handful of currency pairs and the performance had been below expectations, maybe its time to trade some exotic pairs. Having a broader exposure will help during this high-uncertainty environment and will prevent you from getting caught unprepared when risk sentiment takes control over the market again.