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Introduction to Cross Currency Pairs
"Introduction to cross currency pairs: discover what cross pairs are, how they differ from major pairs, and why they create unique opportunities in Forex trading."
Wikilix Team
Educational Content Team
Typically, when new or beginner traders first enter Forex trading, they will automatically choose popular major pairs, such as EUR/USD or GBP/USD. Since major pairs are the most reported by volume and covered by the media, they assume they are the only pairs that have any value. One of the most significant segments of Forex trading that is overlooked is cross-currency pairs.
Crosses offer potential new trading ideas, provide different views on risk, and enable traders to transact without using U.S. dollars, for traders looking to expand their trading options and earn a little more in the global currency markets, understanding cross-pairs is essential.
Cross pairs, or crosses, do not use U.S. dollars but instead correspond to two major or minor currencies.
Examples:
• EUR/GBP (Euro to British Pound)
• AUD/JPY (Australian Dollar to Japanese Yen)
• EUR/CHF (Euro to Swiss Franc)
Cross pairs successfully take U.S. dollars out of the trade, allowing them to start assessing jobs between the two other economies they will interact with.
Before electronic trading, trades in cross-currencies would be transacted indirectly, using the U.S. dollar. For example, to trade GBP/JPY, the trader exchanges GBP for U.S. dollars, then the U.S. dollar for JPY. This incurs additional dollar costs, including commissions, the bid-ask spread, labor, and redundancy.
Modern trading has become the ability to trade cross-currency pairs directly, making cross-currency pairs accessible to retail at the very least.
Cross-currency pairs can be broken down into the major groups as follows:
Euro Crosses
The euro ranks among the top currencies that are traded globally, and crosses with major currencies (i.e., EUR/GBP; EUR/JPY) rank among the highest trading volumes for the market.
Yen Crosses
Currency pairs like GBP/JPY and AUD/JPY can allow for continued volatility and carry trades.
Commodity Currency Crosses
In general, these are currencies that derive strength from resource-heavy or resource-driven economies (AUD, CAD, NZD). For example, AUD/NZD would indicate the balance of the Australian economy compared to the New Zealand economy.
Exotic Crosses
These are any combinations or crosses that may occur with emerging market currencies, and trades can be highly volatile; however, liquidity for these pairs may also be less than that of the majors.
Diversification past the dollar
Most traders are too exposed to USD pairs. Crosses allow a trader to formulate a strategy that is not directly affected by the dollar.
Analyzing economics: For example, analyzing EUR/GBP is a good way to examine how Brexit affects the Eurozone versus the United Kingdom.
Generate volatility
Volatility is a blast!! Cross pairs tend to be even more volatile than a major currency pair. Therefore, providing even more appealing setups and opportunities for short-term traders.
Carry trade
Crosses like the AUD/JPY may still have all the best potential strategic currency trades for positions based on relative interest rates!
There are many benefits and options with crosses, but simply being aware of or considering:
Wider spreads. Liquidity is often worse than majors.
Volatility price can move quickly and erratically.• Less coverage: Financial news and related analysis will often focus more on majors, making it more challenging to locate the information.
Understanding the challenges to traders allows for improved planning to manage risk.
Fundamental analysis
Think about the relative strength of each respective economy. For example, if the Eurozone economy is performing relatively better than the UK economy, the EUR/GBP may trend higher.
Technical analysis
Chart patterns, moving averages, and support/resistance levels are just as proper on currency crosses as they are on majors.
Correlation analysis
Many currency crosses may trade in line with, or against, a particular commodity or major pair. The AUD/JPY, for example, demonstrates correlation to risk appetite in global equities.
Range trading
Cross pairs such as EUR/CHF often trade in ranges that can be well-defined, which makes for a nice support/resistance trader.
Trend following
Traders of GBP/JPY may often encounter barre trading opportunities, or periods of sustained directional movement, which can reward sideways traders who specialize in their strategies using easy moving averages or trendlines.
Carry trade
Suppose one currency offers much greater interest rates than another. In that case, a trader can benefit from not just the physical movement of the currency but can also carry a long position in the higher interest rate currency and collect overnight swap payments.
• Consider starting with the more readily liquid crosses, such as EUR/GBP or AUD/JPY, until you are comfortable moving onto more exotic pairs.
• Experiment with smaller position sizes as the volatility is likely to be greater.
• Pay attention to both economies in the currency pair - currency cross trading involves tracking two different economies and their respective fundamentals to execute positions effectively.
• Get comfortable with demo accounts to practice efficiently.
Let's say a trader monitors fundamental macroeconomic and financial data and observes that the UK economy reports that GDP growth is slowing down. In contrast, the eurozone economy reports inflation that generally exceeds expectations. Viewing the macroeconomic fundamentals suggests the euro (ceteris paribus) should strengthen against the pound. Then the trader looks at the EUR/GBP chart to execute an entry position based on a breakout above resistance levels.
This exercise provides a value of control between fundamental and technical perspectives for more intelligent trading on crosses, when viewing economic fundamentals with their ability to offer dependent fundamentals and technical assessments of the crosses.
Cross-currency pairs are a crucial part of the Forex landscape, as they provide traders with significantly more information and in-depth analysis beyond the major currencies. The cross-currency pairs enable deeper economic relationships; however, they also present additional volatility-driven trading opportunities and variability in a trader's trading plan.
Cross-currency pairs to trade come with challenges, including wider spreads and increased volatility; however, as always, when preparing a plan with sufficient research and implementing robust risk management protocols, they remain a hallmark of availability for retail traders.
If you are a trader who takes Forex seriously, cross pairs are not an optional add-on; they can be part of the new normal.
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12 min
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Intermediate
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