Adventurous traders may find great profit opportunities in trading so-called “exotic” currencies. The term refers to currencies that are traded in low volumes and lack liquidity and market depth. Examples include the Iraqi dinar (IQD), Afghanistan Afghani (AFN), Iranian Rial (IRR) and the Malaysian Ringgit (MYR). When you are trading these currencies the US dollar is generally the base currency, i.e. USD/MYR and USD/IRR.
Why should you consider trading an exotic currency? Basically, they can represent a way to enjoy great profits in the short-term due to their high volatility along with big price moves. For example, in April, the Russian ruble enjoyed some of its strongest highs for 2015, making it the world’s best-performing currency. Following a currency collapse at the end of December 2014 due to sanctions imposed by the West over Ukraine and falling oil prices.
Since mid-January, however, the ruble has increased by 34% against the US dollar, due to improving oil prices, a cease-fire in the Ukraine as well as the waning possibility of “disaster” scenarios such as the government imposing capital controls. In addition, more experienced traders can take advantage of other investment options such as taking out currency options or futures on the currency as well as more complicated products such as barrier options.
However, there are a number of pitfalls associated with trading exotics.
- While they offer good profit opportunities, they also come with high mark-up fees that can hurt your profits.
- Many of these exotics are from countries where there is a lot of political and economic instability, which causes the high volatility that result in high fluctuations in prices. For example, the Iranian rial has been strengthening due to the possibility of the government reaching a nuclear agreement with the West but could weaken again if the talks fall apart.
“If you are planning to trade an exotic currency, make sure that you do your homework, Study the economic and political developments coming out of the country whose currency you are trading so you can identify trading opportunities” Quoted by Mr. James, an analysts from MTrading Egypt. In addition, you should also look at long-term profit opportunities, where you can add the currency to your retirement portfolio as part of your diversification efforts. In this case you can simply open your position and forget about it until it comes time to liquidate it.