Keep things small

As market conditions can shift rapidly in the exotic currency environment, strategists advise retail customers to monitor and limit position sizes carefully.

“Exotic currencies can become very volatile and illiquid without warning,” Jamgotch says.
For example, he pointed to when the Thai baht fell more than four percent against the U.S. dollar in December 2006 when the Bank of Thailand imposed penalties on investments held for less than a year. Spreads on the U.S. dollar/ Thai baht cross spiked from 5 pips to 100 or more, depending on the institution. Jamgotch says many market makers chose not to offer Thai baht crosses during this turbulent time.

Exotic currency traders also have to face the reality that it may be difficult to exit positions because of lack of liquidity outside of local trading hours.

“At the end of the day, it is almost like a futures market position, when the futures close at 2 o’clock and you can’t get out until the next day,” warns Forex.com’s Dolan. For example, he notes that outside of North American trading hours, liquidity is “pretty poor” in the Mexican peso.

“Whatever you do, put on small trades,” suggests Oanda co-founder Olsen.