Support and Resistance Levels - Another method to use trading exotic currencies using support and resistance levels to pick your entry points. As in the below example, you have a tight range but when the price breaks either above or below, you can have powerful moves. Stop entries can be used above and below these support lines to enter into the trade. A stop loss placed back within the support and resistance levels. Picking an exit or take profit can be a tricky task and there are no definitive ways to calculate this.
Exotic currencies are the currency pairs that you do not hear much about. They will only come into the mainstream media if there are very large movements which will normally take place on the back of new announcements. Many traders shy away from these currency pairs (myself included) due to the high volatility and well as high execution costs and swap rates. But there are many benefits of trading these types of pairs such as large market movements allowing you to make very large gains.
You will find that when there are movements they will go in a solid direction for longer than the normal currency pairs. You will not see them move 15 pips and then reverse and continue on in that fashion.
You will also find that they can obey technical analysis protocols more than standard currency pairs do so if you are a technical trader exotic currency pairs are more likely to act along the lines of the patterns you are looking for. As the pairs may only be traded by a handful of banks and a few large brokers they can have a very large moves and then stop on a dime. Many of these exotic pairs you cannot trade spot only deliverable, so the moment after the move there can be no one around that needs to go in the opposite whereas with the rest of the market it is so liquid that any moves that do not have an underlying reason, would reverse to the equilibrium.
Although there are benefits, there are also drawbacks that must be taken into account when preparing to trade. Firstly, you will have an increased cost to trading, this includes a wider spread that can be anywhere from 3 – 10 x the spreads of majors pairs. If you are a long term trader your profits can be severely reduced by high swap charges on positions held overnight. The last cost you will need to be aware of is slippage. Slippage although can be positive, when trading exotics, you are most likely to get negative due to the lack of liquidity. When trading FX, if there are no orders at certain levels the price will move straight through them, so if you have a stop loss in to manage your risk they may not get triggered until a much worse price which means you do not want to use to much leverage. Due to the volatile moves, leverage can also cause you to blow up an account as the large and quick movements of exotic currencies. They can move multiple percent in a day so any leverage above 100:1 would mean that any trade picked wrong would get stopped out before the end of the day.
Which are the best trading strategies for Exotics?
There are three main trade setups that I look for when trading these types of pairs,
Parabolic Curve – As exotic currency pairs traders often have a tendency to have a herd mentality and prone to pushing prices past their true value you can often see these type of chart pattern. Unlike with major pairs, this type of pattern can form on the longer time frames which means there can be large profits to be made on the short side after the rise in a short space of time.
Trending Following – You will find that exotic currency pairs seem to trend at a far higher rate than Major pairs. This allows you the ability to take a single position and hold for long period of time or even keep using pull backs to enter new positions. In the below example you have the USDZAR which moves from a trending market into a parabolic curve. The upward trend is in play for over 4 years with the parabolic curve within the last year. When it hits the peak if you had entered a short position there is almost a 25% decline back to the support line.