In the forex market, everyone pays attention to the major currencies and very little attention is paid to some of the exciting minor currency pairs that are capable of delivering good profits. These currencies, also known as the exotic currencies, are an example of how good things can be found in hidden places. We shall pick a currency of one of the BRICS member countries, which is the South African Rand (ZAR), and study it’s pairing with the US Dollar to see how it can be traded for profit.
Trading the South African Rand (ZAR)
A general principle that is found with the exotic currencies is that fundamentally, they tend to follow correlations. South Africa has one of the largest gold deposits in the world and the South African Rand therefore has a positive correlation with the price of gold.
Another point traders should note is that the periods of volatility are usually highest when the markets of the country producing the exotic currency are open. South Africa is an hour ahead of the Central European Time, so the greatest activity on the ZAR is seen during most of the European session hours.
By nature, exotic currency pairs are illiquid and do not attract large trade volumes. A consequence of this illiquidity is the large spreads that the currency pairs carry. When a currency pair has a large spread, it will have to take the trader a larger account size in order to handle the margin and leverage requirements that is required to control positions and withstand the huge intraday price ranges.
However, what the currency pairs in question lack by being illiquid and more expensive to trade, they make up for in terms of price range and volatility. For instance the USDZAR has an intraday volatility that trumps that of the major currencies, with an intraday price range of between 800 to 2,000pips. There are specific times of the day in which the ZAR picks up trading volume, with the peak occurring at the start of the London session and slowing down during the New York trading session.
You will most commonly see the ZAR paired with the USD on trading platforms that offer this exotic pair, even though the ZAR is also paired with the Euro and the British Pound.
Exotics trade example – ZAR
We will illustrate how the big moves of the USDZAR can be captured with two technical tools: the price channel tool and the Stochastics indicator.
Price action in a channel bounces off the trend lines, providing a means of identifying where to buy or sell. This can be reinforced if an indicator that identifies overbought and oversold conditions is used. This is where the Stochastics indicator (set to 10,3,3) comes in.
If we look at the daily chart of the USDZAR between the 18th of June and 6th of July, there were three channel trading opportunities. By buying at the lower trend line at the time when the price action candle bounced off it with the Stochastics being oversold, and selling when the price action bounces off the upper trend line with the Stochastics at overbought levels, the trader could easily have made money on this trade. Indeed, he would have earned himself so many pips that he probably would have to use a sack to cart them all home.
Here is an example of a live trade that was taken on this currency pair with an expert advisor designed with one of our forex trading systems:
This trade was an intraday trade taken with only 0.1 lots, but was still able to produce $206 in profits. If we had used standard lots for this trade, that would have been $2,060. Considering that a fairly used car can be obtained for this price on Autotrader, this is indeed a wonderful way to trade.
If these are the kinds of profits that can be made from exotic currency pairs, then why are traders not trading them? Firstly, many retail traders were taught with the major currencies and so usually stick to the currency majors. Another reason is that the spreads of the exotic currency pairs are a bit scary. Can you imagine the kind of fright an inexperienced trader gets when he opens a trade and immediately sees his account in debit of 50 to 60 pips or in the case of the USDZAR, about 120 pips?
However, traders should understand that the only difference between the majors and the exotics is that the exotic currencies require more patience, more capital and more time for the trade to play itself out. By learning the rules of exotic currency trading, traders can add another means of currency trade diversification to their portfolio.