As any Forex trader will tell you, the liquidity in the market is what makes foreign currencies such a popular trading market. However, this is only strictly true when talking about the major currencies. Exotic currencies, like the Czech Koruna or the Indian Rupee, are considered illiquid, and while this can make them more difficult to trade for short-term gains, it also makes them a potentially beneficial long-term investment for diversification and security.
Typical Currency Pairs
There are dozens of currencies that can be traded, and because every currency can be paired with every other, this means that there are effectively hundreds of currency pairs. However, market activity typically concentrates on only around a dozen, with a handful being the most common and offering the greatest liquidity. Go beyond the Dollar, the Pound, the Euro, and the Canadian Dollar, and it may take days before you see any real action or major movement.
Liquidity In Forex
The liquidity of a market represents how easily you can open and close trades at the market rate. In the foreign exchange market, it also determines how wide the bid-ask spread is. The wider the spread, the more difficult it is to make a profit, because you need to see greater movement before the price is out of that spread. Trading major currencies means a tight spread, it means being able to easily open and close trades, and it usually means that you will be able to aim for short-term deals.
A Lack Of Liquidity
In contrast, an illiquid market has a wider spread, and there are considerably fewer traders that are looking to buy and sell currencies. Any trading strategy that incorporates exotic pairs needs to take this into account, along with the fact that it can take months, or even years, to see any significant price movement. Your exotic currencies trading strategy should have long-term goals, rather than short-term targets. It can also prove more difficult, although not impossible, to find charts and analysis of these pairs.
Long-Term Investment For Diversification And Security
With all of that said, exotic currencies do still have a beneficial place in a trading portfolio, especially if your portfolio is considerable. The illiquidity means that there is less risk of losing everything, while having some long-term investment means that you can further diversify your strategy. If you still desire greater liquidity than exotic currencies have to offer, but want to diversify away from the major currency pairings, then you could consider investing in ETFs that track these exotic currencies, enabling you to play the current currency and political trends.
