Why You Should Trade the Crosses?
5:31 AM
Finding the right currency pair to trade should be of utmost importance to you as an individual trader. As an individual trader you will only have $1000 to $10,000 at the most as equity in your trading account. Opportunity cost is a real cost for most individual traders. Funds committed to anyone position are funds that cannot be used for in other possibly more profitable trades.
In forex markets, every currency pair is linked to the other one way or the other. As a trader if you adopt a dollar centric view, you risk missing promising trades and opportunities offered by other currency pairs.
Most of the trading is done through the direct buying/selling of US dollar. You should always keep an eye on the crosses in order to gauge the strength/weaknesses of a currency. This will tell you which currency pair is the best to trade.
What are the crosses, you may ask? Currency pairs that do not involve the dollar are known as Crosses such as EUR/AUD, CHF/GBP, EUR/JPY, EUR/GBP etc. Almost 90% of the currency pairs that are actively traded in the forex markets involve the US dollar. In simple terms, over 90% of the all the currency trades have US Dollar on one side of the trade. So what is so special about a cross?
Lets make it clear with a simple example. A good method to trade stocks is from big to small. Suppose, you think that the stock market is rebounding and is expected to rise in the near future. You have limited funds at your disposal as an individual/retail investor; so you should choose the best stocks that can give you good ROI.
It would be good to look at the sector specific indices like health, energy, transport, education, technology. Find the most promising sector among them. Once you have identified a promising sector, you should look within that sector. Find the most promising companies that are expected to perform well over the coming months and buy their stocks. This big to small thinking is very solid. You need to think in the same manner while trading currencies.
Movements in crosses should never be overlooked as they can often hide the footsteps of large players. For example, a major investor like Warren Buffet may be bullish on Euro due to some fundamental reasons. He may try to fly under the radar and buy Euros against Pound Sterling, Swiss Francs, and Yen etc. Warren Buffet is sometimes heavily involved in currency trading when he senses an opportunity. He has sometimes been successful and sometimes unsuccessful.
Crosses are extremely important to swing or momentum traders, they are used as forecasting tools to predict which currencies are leading the pack. Ignore the crosses and you will be stuck often with currency pairs that do not move at all.
With limited funds, you should always try to choose the currency pair that is expected to move the most. But, how exactly you come to a reasonable conclusion? By looking at the crosses!
Cross movements sometimes work to amplify the move of a major currency pair or sometimes these movements minimize the effects. For example, in EUR/USD currency pair, if Euro is dropping against USD but rising against the GBP also called Cable, the net effect would be to limit the size of the EUR/USD fall. If ERU/GBP is rising, it is an indication that the Euro is outperforming the British Pound.
Since you have limited funds, which currency pair is the best to chose? Any EUR/USD selling pressure is likely to be offset by the buying pressure of EUR/GBP. GBP/USD sales will likely to be amplified by the cross sales EUR/GBP.
Since, EUR/GBP is rising; it would be better to short GBP also called the Cable instead of Euro. In simple words, you should short the pair GBP/USD; the chances are you will make many pips as compared to shorting EUR/USD. If we had not done our homework and randomly picked one of the two currency pairs for shorting, we may have missed a good opportunity.
In forex markets, every currency pair is linked to the other one way or the other. As a trader if you adopt a dollar centric view, you risk missing promising trades and opportunities offered by other currency pairs.
Most of the trading is done through the direct buying/selling of US dollar. You should always keep an eye on the crosses in order to gauge the strength/weaknesses of a currency. This will tell you which currency pair is the best to trade.
What are the crosses, you may ask? Currency pairs that do not involve the dollar are known as Crosses such as EUR/AUD, CHF/GBP, EUR/JPY, EUR/GBP etc. Almost 90% of the currency pairs that are actively traded in the forex markets involve the US dollar. In simple terms, over 90% of the all the currency trades have US Dollar on one side of the trade. So what is so special about a cross?
Lets make it clear with a simple example. A good method to trade stocks is from big to small. Suppose, you think that the stock market is rebounding and is expected to rise in the near future. You have limited funds at your disposal as an individual/retail investor; so you should choose the best stocks that can give you good ROI.
It would be good to look at the sector specific indices like health, energy, transport, education, technology. Find the most promising sector among them. Once you have identified a promising sector, you should look within that sector. Find the most promising companies that are expected to perform well over the coming months and buy their stocks. This big to small thinking is very solid. You need to think in the same manner while trading currencies.
Movements in crosses should never be overlooked as they can often hide the footsteps of large players. For example, a major investor like Warren Buffet may be bullish on Euro due to some fundamental reasons. He may try to fly under the radar and buy Euros against Pound Sterling, Swiss Francs, and Yen etc. Warren Buffet is sometimes heavily involved in currency trading when he senses an opportunity. He has sometimes been successful and sometimes unsuccessful.
Crosses are extremely important to swing or momentum traders, they are used as forecasting tools to predict which currencies are leading the pack. Ignore the crosses and you will be stuck often with currency pairs that do not move at all.
With limited funds, you should always try to choose the currency pair that is expected to move the most. But, how exactly you come to a reasonable conclusion? By looking at the crosses!
Cross movements sometimes work to amplify the move of a major currency pair or sometimes these movements minimize the effects. For example, in EUR/USD currency pair, if Euro is dropping against USD but rising against the GBP also called Cable, the net effect would be to limit the size of the EUR/USD fall. If ERU/GBP is rising, it is an indication that the Euro is outperforming the British Pound.
Since you have limited funds, which currency pair is the best to chose? Any EUR/USD selling pressure is likely to be offset by the buying pressure of EUR/GBP. GBP/USD sales will likely to be amplified by the cross sales EUR/GBP.
Since, EUR/GBP is rising; it would be better to short GBP also called the Cable instead of Euro. In simple words, you should short the pair GBP/USD; the chances are you will make many pips as compared to shorting EUR/USD. If we had not done our homework and randomly picked one of the two currency pairs for shorting, we may have missed a good opportunity.
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.
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