Forex Trader - fx currency trade volatility

Many Forex traders – even professional Forex traders – don’t trade exotic currencies.

There are several reasons why. Some traders simply don’t understand the profit potential of trading exotic currencies from smaller emerging market countries.

Emerging Market or “Exotic Currency” World…

Some traders like to stick to currencies they know. So if they’ve been tracking the euro or yen for the last 10 years, they’re not willing to switch over to another batch of currencies from smaller, more out-of-the-way countries.

But let me be the first to say…they don’t know what they’re missing. As I’ve written here in FX University in the past, the single most profitable trade of my entire Forex career was an exotic currency trade.

In fact, the truth is if you catch a trend in exotic currencies, these exotic currencies can regularly hand out as much as five times more profits (or 500% more!) than regular major currencies.

Reason: There are key differences between exotic currencies and regular majors that give them much more profit potential.

Just take a look at the charts below. I’ve included a chart of a traditional exotic currency, the South African rand (USD/ZAR), and a chart from the oldest major currency in the world, the British pound (GBP/USD). While the squiggly lines on the chart appear the same, there are several important differences that we need to talk about.

South African Rand Makes Leaps…

…While the British Pound Strolls

The Strange But VERY Profitable Difference

The first thing traders notice about exotics is how many pips these amazing currencies can move on any given day.

The top chart shows that the South African rand has an average daily range (ATR indicator) of 1,000 pips a DAY during a normal trading year. Last year, during the credit crisis, the South African rand was moving over 7,000 pips in a day!

During the same timeframe, the British pound varied from moving 150 pips a day to 550 pips a day at the height of the credit crisis.

So the actual number of pips these currencies move per day is far more in the exotic pairs than the majors…even volatile majors like the British pound.

Note: The reason for so much volatility is exotic currencies traditionally have thinner volumes than the majors. As such, news events move these exotic currencies more than the major currencies.

Also, when you’re watching exotic currencies, you’ll notice that these currencies tend to have a bit more erratic behavior. That’s because traders in exotic currencies tend to dive in and out faster. In other words, Forex traders want the higher yields and pip movements that only exotic currencies can offer. However, if traders sense trouble, they are quick to bailout of their positions.

 

By Sean Hyman - worldcurrencywatch.com