More than Major Pairs

Shane got such a positive response to his first guest blog post (below) that I wanted to keep his momentum going and give him space to give you a little peak into his world of Forex trading. Many of you have checked out his “Evil Genius Cheats” newsletter, but if you haven't I recommend you do so before he won't let any more free people in. Please enjoy the article, check out his “Evil Genius Cheats” newsletter, and let the comments FLY!!

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Ask any trader what currencies they trade and 99% of them will mention the major pairs.  The EURUSD, GBPUSD, USDJPY and a handful of others.  These are very active, very liquid and perhaps out of habit, the most widely traded.

What about the “exotic” pairs?  The Danish Krone (USDDKK), Singapore Dollar (USDSGD) and a host of other pairs, give ample opportunity for the professional trader to make money.  Right away, the main argument will be about the spread to trade exotics.  True, the spread is much higher than EURUSD but look at the pip cost below while trading 100k.  It is not the standard $10/pip/$100k.

Here are some recent 14 period ATR numbers (Average True Range), pip value and spread:

PAIR	ATR	$/PIP	SPREAD
USD/DKK	520.69	1.89	40
USD/SEK	1355.31	1.28	100
USD/SGD	70.74	6.89	8
USD/NOK	885.22	1.56	75
* Based on Alpari. One standard lot ($100000.00) $1000 margin

Are these markets I would day trade every day?  Possibly, with more backtesting and using a higher timeframe to start.  The “secret” for me at this time, for trading these pairs is to watch for the pairs to start a trend.  How?  Look for break-out of the range, bullish/bearish chart patterns or a host of other methods to catch an impending move.  Why?  One look at the above numbers clearly show the massive potential in catching a multi day move on the majority of those pairs.  Even the USDSGD with its smaller ATR, still rattles out a huge $6.89/pip!  The main reason these pairs move so much is simple…thin volume.  Add in news releases and the volatility can increase 10x as much as the standard major pairs.  We can’t also forget that those that do day trade these pairs, are generally looking for a quick jump and then they run for cover.

Let’s take a quick look at some extreme moves from the beginning of 2009 to July 09.

You can clearly see, once the USDSEK took off, not only did it run for literally 1000’s of pips but it gave ample opportunity for astute trades to get on the train.  Obviously you would not catch the extreme of the move but for illustration purposes, let’s look at some numbers:

16518 pips x 1.28 = $21143.04 (Jan-Mar)
14629 pips x 1.28 = $18725.12 (Mar – Apr)
13826 pips x 1.28 = $17697.28  (Apr – Jun)

Let’s look at the USDNOK

Once again, when the trend occurs, it occurs with some push.  For the better part of March 09, +10244 pips.  From April 20 to the end of May, it was little subdued but 7308 pips at $1.56/pip is a tidy sum of $11400.00

Can you see the potential is adding an exotic to your trading basket?  Will all of them perform?  Probably not.  Do all brokers offer up a nice selection?  No.  You won’t find the Cruzeiro, Baht, Dirham or many others at every broker. Even those that do, are limited in the number of price points they get from their data suppliers.

First thing you’d want to do in deciding on a pair is see if your broker offers it.  Second, bring up a daily chart and look at how the pair trades.  You will see either nice swooping action or, like the USDHKD, extreme low volume sidways action with massive support just below the 7.7500 level.  You will know good action when you see it.

Are you put off about the spread?  Don’t be.  While you may be used to seeing 1.2 – 4 for the majors, keep in mind the cost of those pips AND how much those pair move.  When you are looking at a 100 pip spread at an exotic, look at the cost per pip but also the average movement of that pair.  Many times, you will see that those combined factors offset the psychological mishmash of a high spread.  The spread cost can be wiped out quite quickly simply due to the volatility of the pairs.

Fundamental junkies will no doubt not enjoy trading the exotics.  Frankly, the airwaves are not blaring the latest news out of Singapore or some other far off land.  Just know that when investors are not adverse to risk, the exotics are a good place to shop.  The opposite is also true.  When concern arises over the state of the economy or anything else that gives investors pause, look for a decrease in risk appetite and a move away from the exotics.  That alone gives you opportunity elsewhere.

The fx market is unlimited in potential.  Don’t limit yourself to the popular pairs especially when opportunity, and great opportunity at that, can be found in “exotic” locales.  Your trader buddies may not have a clue what a “SEK” is, but your account balance sure will when you get on the right side of the move.

By Shane Daly
NetPicks Coach for the High Velocity Market Master System