Understanding Cross Currency Pairs and How to Trade Them

Are you someone who wants to step into the forex market or the one who is trying to learn about forex trading?

If yes, then you must have heard about the types of currency pairs, like major currency pairs, minor currency pairs, and cross currency pairs. Honestly, most beginners start by trading major currency pairs like EUR/USD or USD/JPY because of higher trade volume. But, in the spark of these major pairs, it is worth exploring the cross currency pairs.

In this blog, we will learn about cross currency pairs, why they matter, and how they can add new opportunities to your trading strategy. We’ll also explore a simple currency trading technique to help you understand and apply these concepts easily.

What Are Cross Currency Pairs?

Forex markets run on the nerves of currency pairs, i.e. by showing the exchange rate between two currencies. The currency on the right is called the base, and the other one is known as the quote. For example, in EUR/USD, the Euro is the base, and the U.S. Dollar is the quote.

And what about the cross-currency pairs?

Mostly, currencies are traded with U.S. dollars. But when a currency pair does not include the U.S. Dollar, it is called the cross currency pair. Instead, it involves the exchange between two other major currencies.

Some of the examples of cross currency pairs include:

·         AUD/NZD (Australian Dollar / New Zealand Dollar)

·         EUR/GBP (Euro / British Pound)

·         EUR/CHF (Euro / Swiss Franc)

·         GBP/JPY (British Pound / Japanese Yen)

Though these currency pairs are not directly tied to the USD, they are still highly traded and liquid pairs.

Now, this question is, when are the best forex market trading hours for these pairs?

To understand this, you need to find the most active sessions based on the regions the currencies belong to, and that’s it.

Why Trade Cross Currency Pairs?

The cross currency pairs can offer real benefits. Some of them are:

·         More trading opportunities: It cannot be denied that the major pairs (containing USD) mostly move based on U.S. economic news. But, in contrast to this, the cross pairs can be influenced by other considerable factors such as European or Asian events, etc., and this can give you more chances to spot trends.

·         Lower exposure to USD: During the uncertain times in the U.S., the currency pairs with USD experience a lot of volatility. So, if you are someone who wants to reduce exposure to the U.S. Dollar, cross currency pairs can be a better alternative as they let you trade without it.

·         Unique trends: It is seen that sometimes the cross pairs move differently than major ones. Thus, trading cross currency pairs can help traders diversify their trading strategy and avoid relying only on USD-driven price moves.

How to Trade Cross Currency Pairs?

Now that we know about what cross currency pairs are and what their benefits are, let’s learn how to trade them. Honestly, trading cross currency pairs is not much different from trading major currency pairs, but it does require a little extra attention.

Here are some simple currency trading techniques to help you get started:

Understand the economies behind these Currencies:
For any currency pair, price movements are driven by the strength or weakness of the countries involved. This means, if you are trading EUR/GBP, then you should know and stay updated on the economic health of both the Eurozone and the UK. For this, you need to keep an eye on their interest rate decisions, inflation data, employment figures, and lastly, the political events like elections or Brexit-type scenarios.

Check market sessions:

You need to know that each currency is most active during its region’s trading hours. For example, if it is about the EUR/GBP, then it is most active during the London session. But, if you are trading AUD/JPY, then it is likely to be most volatile during the Sydney and Tokyo sessions. Thus, understanding these market sessions can help you trade when there is enough liquidity and movement in the pair by avoiding periods of low volatility.

Use technical analysis:
If there, you can have a best friend in trading, it has to be charts. Cross pairs can sometimes be more volatile than major pairs, so identifying clear support and resistance levels becomes even more important. Use tools like trend lines, moving averages, RSI (Relative Strength Index), and MACD (Moving Average Convergence Divergence) to spot patterns and potential entry or exit points.

Start small and practice

If you are new to trading cross pairs, it is advised to start with a demo account. It can help you get comfortable with how these pairs behave before trading real money. You can start with small lot sizes and always use a stop-loss to protect your account from large losses.

Conclusion

In conclusion, the cross-currency pairs are an exciting part of forex trading. They offer more variety, unique market movements, and the chance to profit from global economic changes beyond the U.S. Dollar. With the right research, technical tools, and risk management, you can confidently add them to your trading toolbox.