Why exotic pair spreads are only part of the story

[Shadow Trader]

Exotic pairs like USDZAR, USDTRY, and USDMXN carry much wider spreads than majors, and everyone knows it. The spread, though, is only the visible cost.

Other costs sit underneath. Slippage tends to be larger because order books are thinner. Swaps can be far more extreme, in either direction, because interest rate differentials are bigger. Gaps appear more often, and trading hours may be limited by local market closures.

The profit potential is real too. Exotic pairs can move several hundred pips in a day, and a scalper who targets small moves may find that a wide spread is a smaller fraction of the potential range than it looks.

The key is to measure all costs together, not just the quoted spread. A pair that costs thirty pips per round trip and moves two hundred pips per day may still be more efficient than a major with a one-pip spread and a thirty-pip range.

Curious whether you have traded exotics on a short timeframe, and how did the real cost compare to what the spread suggested?