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Can you apply the MACD indicator to exotic currency pairs?

Can you apply the MACD indicator to exotic currency pairs?
Asked by
Anna Winter time-icon2 weeks ago
1 Answer Answer Question

Steve Walters
Answered time-icon2 weeks ago

The MACD indicator, also known as the moving average convergence divergence indicator, is popularly used to identify potential trade setups where the overall price trend is set to change. For example, you can use the MACD indicator to identify potential areas where a bullish trend my end, leading to a bearish trend, and vice versa.

We have discussed how to use the MACD indicator in previous articles, so now we will focus on how you can use the MACD indicator to identify potential trade setups on exotic currency pairs.

 

What are exotic currency pairs?

Exotic currency pairs are currency pairs that include a major currency such as the US dollar, the pound Sterling, or the euro, combined with currencies from emerging economies, such as the Turkish lira and the South African rand. Exotic currency pairs are different from the more actively traded major and minor currency pairs, and they tend to be less liquid.

However, the lack of liquidity may not be a big issue with some of the popular exotic currency pairs, such as the USD/ZAR (US dollar/South African rand) pair or the USD/HKD (US dollar/Hong Kong dollar) pair. When trading exotic currency pairs, you need to look out for the funding costs associated with such pairs.

Chart 1: USD/ZAR chart with MACD indicator

 

What are funding costs?

Funding costs are the charges associated with trading a particular asset, such as a currency pair or a commodity. These costs are usually derived from the buy-sell spreads and swap fees, which are the fees charged by brokers for holding your positions overnight.

The major currency pairs, such as the EUR/USD pair, have low funding costs. The spreads between the buying and selling price are usually quite low, with some brokers even offering 0.0-pip spreads.

However, exotic currency pairs usually have high spreads largely due to the low liquidity associated with them as well as the higher risks associated with emerging market economies.

This means that you have to understand how an emerging country’s economy works before trading its currency as most emerging markets are prone to sudden price moves that could see your spreads widen, leading to losses.

Chart 2: USD/TRY chart with MACD indicator

 

Trading exotic currency pairs using the MACD indicator

Now that you are familiar with the funding costs associated with trading exotic currency pairs, let’s look at how you can use the MACD to trade these currencies.

Chart 3: USD/ZAR chart with MACD indicator trade setups

As you can see from the USD/ZAR daily chart above, you could have easily used the MACD bullish crossover that occurred on 6thFebruary 2019 to enter into a long trade and could have ridden the trend up to 19thMarch 2019, when a bearish MACD crossover occurred and triggered a short signal. At this point, you could have exited the trade for a nearly 1,000-pip profit.

You could have taken a long trade on 25th July 2019 and you would still be in this long trade on 13thAugust 2019 with over 1300 pips profit because the trend was still bullish at the time of writing. You can see from the above chart that you could have booked massive profits by simply using the MACD indicator in your trading.

 

Disclaimer

This article is not a recommendation to buy the above currency pair as the data presented here is for information purposes only and refers to past price setups that could have changed significantly by the time you read this article.

Chart 4: USD/TRY daily chart with MACD indicator trade setups

Here you can see a long trade setup that was triggered on 11th February 2019, which could have been closed on 10th May 2019 for a profit of over 700 pips. Again, remember that these are historical trades that may not be valid by the time you read this article.

 

The bottom line

As you have seen in the previous examples, you could have used MACD crossover signals to profit handsomely when trading the two exotic currency pairs over the period shown above.

This means that exotic currency pairs may provide excellent opportunities for traders who are comfortable with the high funding costs associated with these pairs as well as the higher risk levels inherent to these currency pairs.

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