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What is a Cross Currency Trading
Written by: PaxForex analytics dept - Wednesday, 20 September 2017 0 comments
Back in the ancient days, if someone wanted to change currencies, they would first have to convert their currencies into U.S. dollars, and only then could they convert their dollars into the currency they desired. With the invention of currency crosses, individuals can now bypass the process of converting their currencies into US dollars and simply convert it directly into their desired currency. While the U.S. dollar is the most liquid currency, making up the majority of the volume traded throughout the globe, there are additional opportunities available for traders who are willing to include cross currency pairs.
Naturally, traders choose the majorcurrency pairs since it is much easier to predict this type. The main thing is to make an assumption about the price change. The US dollar is affected by a large number of factors. This is the reason the forex market has a high level of volatility and the prices of currency pairs fluctuate very sharply. However, it is easier to trade the main currency pairs despite all the disadvantages.
Trading the cross currency pairs offers significant opportunities to the forex trader. Perhaps one of the most important benefits of trading crosses is that it gives the forex trader the possibility of considerably expanding their horizons in the forex market to a much wider group of trading instruments. Nevertheless, it is important to keep in mind that cross currency pairs often do not offer
the same degree of liquidity or the tight dealing spreads available in the major currency pairs that are traded against the U.S. Dollar.
Trading cross currency pairs can produce more opportunities for traders when added to their range of trading instruments. Exotic currency pairs are made up of a major currency paired with the currency of an emerging or a strong but smaller economy from a global perspective such as Hong Kong or Singapore and European countries outside of the Euro Zone. These pairs are not traded as often as the majors or minors, so often the cost of trading these pairs can be higher than the majors or minors due to the lack of liquidity in these markets.
The most popular cross-pairs are those with the euro. It is obvious because this currency is the second most popular in the world. Traders most often choose the following currency crosses: EUR/CHF, EUR/GBP, and EUR/JPY. In addition to the euro cross-pairs, cross-pairs with the Japanese yen are also popular. For example, many traders prefer to work with: CAD/JPY, NZD/JPY, and GBP/JPY. These pairs are characterized by low liquidity, but they can bring some profit due to good technical and fundamental analysis. This is a stable profit, however, it is quite small. One has to be careful opening deals with these currency pairs, because swaps will be larger when the order is moved to the next day.