Bryan Seegers, chief dealer of Alpari (U.S.), says looking for correlations can be a good starting point when you begin looking at exotics (see “Finding correlations). “Look at the country of the currency you’re looking to trade and see what it is profiting from. An example would be that if you’re looking to trade the Russian ruble, you’d be interested in how oil is doing because of that correlation, or vice-versa, the South African rand’s correlation to gold. Being that these countries are producers or consumers of these in a large scale, it’s a large factor to consider,” he says. Additionally, Seegers adds, “Correlations change frequently and checking those is part of doing your due diligence before just investing.”
One of the aspects that often draws traders to the currency markets is the availability of leverage. Leverage allows traders to control a much larger position than their account sizes could fund. This means gains can be multiplied, but it also means losses can be more severe as well. Although at one time brokerages offered leverage up to 1:100, the Commodity Futures Trading Commission recently lowered the level brokers could offer to 1:50 for majors and only 1:20 for minors. Consequently, it will take a larger account size to trade exotic currencies than majors like the EUR/USD.
Additionally, because these are smaller markets, you often will see the order book can be much shallower because of less volume. Consequently, it may sometimes be best to restrict your trading to only particular parts of the day when the local market is open for the currency you are trading. “From a structure perspective, there is less liquidity at certain parts of the day,” Fischer says. “The majors all have pretty tight spreads throughout the day, but one of the challenges of the exotics is understanding how to access liquidity you actually can trade against.”