Most forex traders trade one or two currency pairs. In this article we will discuss how to trade exotic currency pairs. We trade 28 currency pairs, 21 of which are exotics, and we will also learn how to use the exotics to assist us with each and every entry as well as our overall market analysis.
An exotic pair is a currency pair where the USD is not on either side. For example the EUR/JPY, AUD/CAD and the GBP/CHF are exotic pairs. Trading the exotics is hugely rewarding because generally speaking when the USD pairs are not moving the exotics start to move, which facilitates daily trading and pip potential across 28 pairs. The 28 pairs we trade are various combinations of the 8 major currencies.
You can find a trade nearly every day or certainly 4 out of 5 days of the week if you trade exotic currency pairs along with the majors and it will increase your profit potential by tenfold versus trading one or two pairs or just trading the majors alone.
Do Not Follow This Poor Advice
Any trader, trainer or educator who advises you to “only trade one pair” or “get to know one pair really well” is completely and categorically wrong. Advising someone to not trade the exotics indicates clearly that this person does not understand a total market analysis approach, parallel and inverse analysis, or how to take advantage of movements of individual currencies. These educators and the traders who follow them are missing out on the opportunity the market provides and have only limited pips to trade, and they are passing along poor advice. They continue force trades into the EUR/USD or default to scalping, or else they force trades into the majors when the exotics are moving very fast.
The Correct Path
The currency market is loaded with opportunities. Paper trading the exotics will get you over any possible objections to trading them. Sometimes the spreads are actually lower on the exotics than some majors on non deal desk platforms or ECN brokers. The spreads on the exotics have been consistently dropping over the years due to the competition and increasing liquidity on the spot fx market. Even with a deal desk broker whats the difference between making 200 pips and 198 pips on a trade?, who cares, it does not matter. Also if you hang onto your trades with swing to position trading it doesn’t matter what pair you trade.
Using The Exotics In Your Market Analysis
The exotics should be reviewed daily as part of your overall market analysis and as part of the trade planning process, for example if you are analyzing the USD/CAD you must review all of the USD pairs plus all of the CAD pairs to properly conduct your analysis. The CAD/JPY, EUR/CAD and AUD/CAD must be checked to get a better handle on the USD/CAD to see what the CAD is doing. Then you must review several USD pairs to get a handle on the other half of the USD/CAD to complete the analysis. This is the logic of the forex and the crux of parallel and inverse analysis.
Also when you are conducting an analysis of any currency like the JPY you would do it rigorously in individual currency groups i.e. USD/JPY, AUD/JPY, GBP/JPY. And so the exotics play a pivotal role in the market analysis process of the JPY (Japanese Yen) to determine if the Yen is strong, weak or mixed.
For the purposes of trade planning whether or not a pair is a major or exotic is not even considered or is even relevant, you look at all of the pairs in the currency group.
Using The Exotics to Enter Trades
At the point of entry the exotics are of critical importance and The Forex Heatmap® is proof of this. A pair like the EUR/GBP is a great indicator on the heatmap, you may never trade this pair but it is an extremely valuable indicator if considering trading any EUR or GBP pair to detect strength or weakness in either group. Sometimes you will get a direct indication to trade the EUR/GBP and that is when you realize its time to abandon the mindset of trading just the majors.
If you don’t review the exotics when analyzing the market or at the point of entry then you are working with less information than the other traders who do. The more information a trader has, the better. Analyzing more pairs and checking The Forex Heatmap® at the point of entry gives you the extra information to beat all of the other traders hands down.
When you are getting ready to buy or sell the USD/CAD you check The Forex Heatmap® and the same CAD pairs you checked when you were doing your market analysis could be checked again to make sure your trade entry is safe. Looking at the exotics on the heatmap will help you to support entry decisions on other pairs. The sell signal on the EUR/JPY on the image below can be verified by looking at 13 pairs at once, and most of them are exotics, so in this case the exotics are extremely valuable. You must look at many pairs, including majors and exotics, to verify the entry. The EUR/JPY is an an exotic pair with good movement and volatility.
It’s okay to trade the USD pairs also! But most forex traders do not even trade majors like the USD/CAD or the NZD/USD because they are not looking at any CAD or NZD exotics to verify their entry! This is a huge lost opportunity.
If the USD is in a strong trend and the driving force in the market you should be able to tell by checking that the exotics are not moving very much or inconsistent in their trend patterns or on the The Forex Heatmap®. This is additional value that the exotics bring to the table.
GENERAL RULE: If the majors are moving the exotics are quiet, if the exotics are moving the majors are quiet, this makes sense because of how the pairs are constructed. If you are nimble as a forex trader you can take advantage of this.
Some exotics like the EUR/JPY have very low spreads and move extremely well, pairs like the AUD/CAD move slower, pairs like the GBP/AUD move like very fast like a roller coaster and some traders like the volatility and thrive on it.
Swaps/Intrest on The Exotics
The highest swaps (rollover interest paid daily) will be available on the exotics, currently pairs like the AUD/JPY, and AUD/USD pay high daily interest on buy trades. So in a trending market on pairs like this you can go with the best trends and “trade in the direction of the swap” if you are interested in the extra daily carry trade interest for your account. Interest rates are low across the board now as of this writing in August 2014 with the exception of Australia and New Zealand but rates will go back up over time.
Only pip potential and ability to catch a movement cycle is what matters with forex trading. The rules of paper trading and then trading micro lots prior to moving up to full scale lot trading still apply to trading the exotics. Trade the exotics along with the majors and make up to 10 times more pips and have 10 times more trading opportunities than the EUR/USD scalpers traders or forex traders who only trade one or two majors. Use the exotics for assisting with your market analysis and trade entries using The Forex Heatmap® and it becomes very clear that the exotics are critical to successful forex trading. At Forexearlywarning we are forex market traders not just EUR/USD scalpers. We tap all of the potential of the forex market with our tools, indicators and analysis techniques.