As you gradually gain confidence in your forex trading, the need and they want to experiment is quite natural. One of the first ports of experimental trade is the exotic currency transactions. Sometimes the need to do something different and unique pushes the forex trader towards these exotic and unusual currency pairs because they look more promising at the beginning. But, before we proceed any further, it is extremely important to understand the basics of these exotic pairs and the associated risks.
Because the exotic forex pairs are more thinly traded, they are by definition less liquid. Therefore, they should not be traded arbitrarily. All things being equal, a more liquid market is more open to a trader than a less liquid one. Specific circumstance may make exotics pairs an attractive proposition, though. They may offer exposures that you can't get elsewhere or quite in the same way. Huge shifts in price are not uncommon for exotic crosses once a fundamental trend sets in.
The timezone and trading session where you place your transaction needs to be considered when trading forex currency crosses. During early Asian hours, many of the European crosses and the Canadian dollar have weak liquidity. To protect themselves from low liquidity, forex brokers will charge a larger than normal spread to make a market in a cross that is not liquid in their time zone. Just as a refresher, many forex brokers make money by taking advantage of the bid-offer spread on currency trades. The difference between the sale and the purchase price is the spread and this is the incremental value, which the broker uses, to make money from transacting currency trades.
When the exotic cross currencies pair is used when the risk might even be higher as these currencies offer a huge spread that would require a trader to deposit higher money to at least make some marginal profits. The economies of many exotic currencies are not very stable as any political deviation can affect everything in the market. There are numerous powers jostling among nations that pose exotic currencies; these power struggles can be very detrimental to trading as they may make economies to nearly collapse.
Forex trading is all about taking a calculated risk and it is perfectly possible to make a profit trading exotic currencies. For most traders though, sticking to the more common pairs is both easier and less dangerous in the end. As many exotic currencies are associated with smaller or emerging economies, there may be a possibility of geopolitical issues upsetting those markets. Even if you are familiar with a given country and its economy to the point where you are able to trade the news on a reasonably accurate basis, there may be a general lack of expert analysis and research to back up your own readings of the situation.