Why Trade Crosses Instead of Majors

 Most individuals new to Forex trading are immediately drawn to the majors: EUR/USD, GBP/USD, or USD/JPY pairs, since these pairs tend to be well-known, heavily traded, and frequently presented as the "go to" currency pairs for new traders. However, the Forex market is much larger than simply the majors. There is a wide range of conditions and opportunities in cross-currency pairs, or "crosses," which in fact exclude the dollar.

So, why would a trader take a cross over a major? The answer is simply diversification, unique opportunities, and, to a certain extent, captures moves that the dollar does not necessarily explain. This discussion looks at the rationale for including crosses permanently in the toolbox of any trader.

What are Cross-Currency Pairs?

Cross currency pairs are any Forex pairs that do not include the dollar. For example:

• EUR/GBP (European Union vs. British Pound)

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

• EUR/CHF (Euros vs. Swiss Francs)

These currency pairs indicate the relative strength between two economies, not based on the dollar. Crosses used to require that a trader convert through the dollar first historically; however, with today's platforms that is no longer necessary nor efficient.

The Commodity Of Trading Crosses

1. Diversification beyond the U.S. dollar

Major pairs are evident and most driven by the U.S. dollar. When trading majors, you are betting on the strength of the dollar or the weakness of the dollar. Crosses allow you to diversify, and focus on the economic relationships with different economies, e.g Europe vs U.K, or Australia vs Japan and so on.

2. More Direct Economic Comparisons

Crosses remove the dollar from the equation and show how two regions are performing in relation to each other. For example, instead of looking at EUR/USD and GBP/USD separately, when you are trading EUR/GBP, you get a clearer picture of the Eurozone vs. the U.K.

3. Greater Volatility and Opportunity

Some crosses, such as GBP/JPY, are known for their swings in price. While this volatility comes with risk, it also presents some of the more favorable opportunities for traders who know how to manage volatility.

4. Carry Trade Potential

Many crosses are incomparably popular in carry trades as traders try to earn interest from holding the higher-yield currencies against the lower-yield currencies. The AUD/JPY and NZD/JPY have long been two of the more popular pairs for a carry trade.

Commonly Traded Crosses

Euro Crosses

EUR/GBP, EUR/JPY, and EUR/CHF are among the more liquid and more widely followed cross pairs.

Yen Crosses

Some popular crosses, such as GBP/JPY and AUD/JPY, are popular in part due to volatility and global risk appetite.

Commodity Crosses

AUD/NZD and CAD/JPY are two pairs that more directly represent the strength of commodity economies.

Although each of the categories has more unique patterns of price behavior and characteristics for traders to provide value in their respective market environment.

Comparing Crosses to Majors

1. Liquidity

Majors are considered to be the most liquid instruments in the Forex market, which typically equates to tighter spreads. Crosses are likely wider spreads, yet with continued widespread popularity, many crosses are still quite tradable given the overall liquidity.

2. News Sensitivity

Majors are sensitive to U.S. data. On the other hand, crosses provide traders with the chance to trade economic and news events related to other economies that are sometimes overlooked.

3. Relative Strength Comparisons

Crosses allow traders to follow the opportunities where one economy is stronger than another, even if the role of the dollar influences, making that dynamic more opaque in the major pairs.

Risks of Trading Crosses

While crosses can be profitable, there are also some inherent risks, such as:

• Wider Spreads: Some crosses can be less liquid, which increases the cost of trading.

• Volatility: Price action can swing significantly and create a greater degree of risk.

• Lack of information: Media tends to cover the majors more than the cross, so having to scour more news to get good info can add a level of annoyance.

How to get started trading crosses

1. Use a Blend of Fundamentals and Technical

Analyze the relative strength of the two economies in the respective currency pair, and then analyze the charts and mechanics to time your entries.

2. Understand Correlations

Crosses will often have relationships with other major pairs. For example, EUR/GBP will move with EUR/USD and GBP/USD.

3. Focus on Liquid Pairs First

Starting with pairs like EUR/GBP, EUR/JPY, and AUD/JPY will offer traders a better experience than using more exotic pairs with little liquidity.

4. Risk Management

Crosses are usually more volatile, so they require more disciplined sizing of positions with stop loss placement.

Example of EUR/GBP

If the Eurozone releases higher than expected inflation and the U.K. economic reports signal weak retail sales, trading one of the majors, EUR/USD or GBP/USD in this example, would be dollar influenced but does not tell one to the other directly whether the euro has strength or weakness relative to the U.K. However, trading EUR/GBP would reflect the relative strength between both economies.

Advantages of Crosses for Experienced Traders

Foreign exchange crosses present attractive positions to experienced traders because they:

• Offer hedging from dollar exposure.

• Provide opportunities to trade pairs during times of lower volatility.

• Provide a unique pattern of volatility and often different trading patterns for strategies.

Conclusion

Major pairs will always dominate headlines in forex, but cross pairs can provide an equal platform for attention. Trading crosses may add diversification, trade-offs if a trader looks for comparative comparisons between economies, and trade-offs for short-term and long-term trades.

Trading crosses can add to a trader's existing strategies, lessen the reliance on the dollar, and promote an increase in potential profit.

The key is preparation, understanding the fundamentals, tracking the economic matrices of each economy, evaluating technical charts, and risk management. Overall, if you practice a methodology, cross-trading can become a valuable tool in your trading toolbox when shifting between trades.