Currency Crosses and Trend Opportunities

When novice forex traders first enter the Market, they generally focus on the big players, the major pairs, such as the EUR/USD or GBP/USD. These pairs tend to dominate headlines and trading volumes, but they are not the only opportunities available. Outside of the majors, there exists an entire tier of trades that often go unnoticed: Crosses.

Cross pairs, or cross-currency pairs, are any pair that does not include the U.S. dollar in either leg, and they can produce significant trends that the majors sometimes do not. For the trader who wishes to diversify their strategies and find new opportunities, knowing how to analyze crosses is fundamental.

What Are Crosses?

A currency cross (or simply a cross) is a Forex pair that is not based on the U.S. dollar. Some crosses include:

• EUR/GBP (Euro vs. British Pound)

• AUD/JPY (Australian Dollar vs. Japanese Yen)

• EUR/CHF (Euro vs. Swiss Franc)

Therefore, rather than examining the strength of a currency against the dollar, a cross examines the relative strength of one economy against the other.

Why Crosses Matter

1. You are diversifying the U.S. dollar

The majors are all dollar-centric. By only trading majors, your trading success can depend on U.S. data releases and any movements related to U.S. Federal Reserve policy. Crosses allow us to move away from the dollar and focus on trades based on different economies.

2. You are taking a direct comparison between two economies

Crosses are removed from the dollar, giving us a clearer perspective on how a region stacks up against another. For example, the EUR/GBP displays the balance between the Eurozone and the U.K. This is very useful for holding trading news, such as Brexit or the impact of distinct Trends

Some crosses trend more effectively than majors. GBP/JPY is an example of this, as it exhibits directional moves designated length, which leads to superior trend-following opportunities.

Categories of Cross-Currency Pairs

Euro Crosses: The most liquid and widely traded crosses, EUR/GBP and EUR/JPY, are sought out by traders for both stability and volatility.

Yen Crosses: The crosses often traded, such as AUD/JPY or GBP/JPY, exhibit large intraday swings and are utilized in carry trades.

Commodity Crosses: AUD/NZD and CAD/JPY frequently reflect global demand for natural resources, and are utilized by traders who follow commodity cycles.

Identifying Trend Opportunities in Crosses

Successfully trading crosses is to learn to identify trends that are not readily apparent in the majors.

Using Technical Analysis

• Moving averages indicate trend direction and momentum.

• Trendlines provide insight into potential breakouts or continuations.

• Patterns (triangles, flags, or head-and-shoulders) are especially relevant in volatile crosses.

Combining with Fundamentals

Crosses respond well to relative economic performance. For instance, if the Australian economy is performing well and the Japanese economy is stagnating, AUD/JPY will likely trend upward over the medium term.

Global Risk Sentiment

Some crosses act as risk barometers. For example, AUD/JPY and NZD/JPY will increase when global market risk is on and decrease when risk is off.

Advantages of Trading Currency Crosses

1. New opportunities to expand your trading universe, beyond the most overcrowded pairs.

2. Better trends, often crosses move cleaner and exhibit longer duration moves.

3. Hedging Capability: Crosses can be a helpful way to hedge significant dollar-heavy portfolios.

4. Carry Trade Prospects: Non-USD currency pairs can offer consistent carry trade profits based on interest rate differentials.

Potential Pitfalls

• Wider Spreads: Certain crosses, due to lower liquidity, can lead to wider spreads and higher trading costs.

• Sharp Moves: Moves can be unpredictable and fast (for example, GBP/JPY).

• Lack of Media Coverage: Most news and analysis are focused on major currencies, meaning you will need to do some digging and research of regional news on your own.

Example: EUR/GBP Trend Setup

Suppose that over a period of several months, the Eurozone exhibits better economic data than the U.K. You may have established fundamentals implying the euro strength relative to the pound. The trader would confirm this buy-side bias with technical analysis (for example, a breakout above prior resistance on EUR/GBP) to capture a clean trend that might have been masked in the major currency pairs due to dollar moves.

How To Trade Crosses

1. Trend following - Identify long-term moves using various moving averages and trade pullbacks to find entry points.

2. Range Trading - Certain crosses most frequently respect tight ranges, and are ideal candidates for support/resistance price action setups (for example, EUR/CHF).

3. Carry Trade - For crosses, you can take advantage of rate differentials either holding a higher yielding pair versus a lower yielding one, or conversely, holding a higher yielding currency and selling a lower yielding currency to offset future weaknesses in the higher yielding currency.

What a Trader Wants to Consider

• As a starting point, focus on more liquid pairs before venturing out to the more exotic pairs (like EUR/GBP and AUD/JPY).

• Use a stop loss to cover yourself in case of a sudden volatility situation.

• Keep a very close watch on both economies. A cross is essentially a combination of two related economies, specifically those involving two different currencies.

• Be patient: many moves in crossing currencies are likely to happen over a course of weeks, months, or longer than just a few days.

Conclusion

Currency crosses are far more than just a sidebar in the Forex market—that is, they can be a doorway into discovering hidden trend events and providing opportunities to establish market flexibility. Even though majors probably get the front page headlines in analysis and are used in advertising, crosses give you the potential to examine correlation across two economies, analyze economics outside of USD, explore opportunities in several crosses, and discover trend opportunities that may have been masked in the majors due to dollar moves.

While there are disadvantages to crossing (like wide spreads and sharp volatility), most of this risk can be managed very easily with solid research and analysis and the use of prudent risk management.

Ultimately, a serious trader will overlook ample opportunities in the Market by not examining crosses as part of their growth strategy. You can only expand your strategy, flexibility, and ultimately review traders' success to the extent you learn to notice and take advantage of trend opportunities in cross-currency pairs.