How to Trade Exotic Currency Pairs
Trading the exotic currency pairs is less popular than the major currency pairs such as EUR/USD and USD/JPY, but the mechanics of trading is the same. Both technical and fundamental analysis work similarly for exotics, and the same strategies that work for the major pairs can generate signals for the exotic currency pairs. But what to do when your broker does not support trading with the specific exotic pair? Changing a broker to open a position is rarely a good idea, but there is a way to trade some pairs at the brokers that do not support them.
Exotic currency pairs are also often called cross pairs because, in reality, they are often nothing more than derivatives from other major currency pairs. That opens a possibility to substitute such pairs with majors or minors. For example, you want to sell NZD/JPY, but your broker has no such pair. At the same time, it offers NZD/USD and USD/JPY. So, all you have to do is sell both NZD/USD and USD/JPY. The resulting positions will give you the same combined profit as the NZD/JPY short position would give you. Another example: if you want to buy EUR/AUD, but your broker only offers EUR/USD and AUD/USD, then you just need to buy EUR/USD and sell AUD/USD. The general rule is the following: to go long on a cross XXX/YYY — buy a major with XXX as the base currency (the first one) or sell one with XXX as the quote currency (the second one), then sell a major with YYY as the base currency or buy it if YYY is the quote currency. To go short — perform the opposite trading operations.
Unfortunately, this technique has two important disadvantages:
- You cannot set
stop-lossand take-profitlevel like with a single currency pair position. You depend on two positions combined and the majority of the Forex brokers does not support combined stop-lossesor take-profitson two orders. Of course, you can assign separate SL and TP on both orders, but that does not mean that they will get executed simultaneously. As a result, one position can be closed out earlier, leading to unforeseeable losses in another trade.
- Position size uncertainty makes it difficult manage your risks in such trades because the base currency for these positions can be different. When entering such hedged positions, it is necessary to calculate the precise position size for both trades.
If you do not trade exotics too often and you like your current broker, then you probably would not want to switch your company to get more currency pairs. But if you open such positions more than once a month, then this technique is not perfect for you. In this case, I would recommend changing your brokerage.