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2024/05
Cross-currency trading: What you must know!
Cross currencies, also known as cross pairs, refer to currency pairs that do not include the US dollar. Generally, most traders prefer to trade major pairs, so why do cross pairs exist? How are they calculated? What advantages do they offer?
What Are Cross Currency Pairs?
Cross-currency pairs don’t have the same high liquidity as significant pairs but still have sufficient liquidity. Here are 21 cross pairs:
AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, CHF/CAD, CAD/JPY, CHF/JPY, EUR/AUD, EUR/CAD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/NZD, GBP/AUD, GBP/CAD, GBP/CHF, GBP/JPY, GBP/NZD, NZD/CAD, NZD/CHF, NZD/JPY.
How to Trade Cross Currency Pairs?
When trading cross pairs, you can use the currency you are stuck in as the base currency and buy the strongest currency in the current market. By doing this, you increase your base currency through cross-pair swing trading, naturally lowering your holding costs, eventually breaking even, and possibly making a profit.
Cross-pair volatility tends to be relatively large, allowing free trading between currency pairs. If managed well, there are many profit opportunities. After profiting from cross-pairs, you can convert back to your original currency or directly to US dollars, offering great flexibility.
Trading cross pairs involves directly buying and selling two non-USD currencies, which reduces the spread and lowers trading costs.
Calculating Cross-Pair Profits
To trade cross-pairs, you should first understand how the quotes are generated. For example, if we want to know the bid/ask price of GBP/JPY, we need to find the bid prices of GBP/USD and USD/JPY.
Why these pairs? Because both GBP/USD and USD/JPY include the USD.
Now, let’s look at the bid/ask prices of these pairs:
- GBP/USD: 1.38769 (ask) / 1.38785 (bid)
- USD/JPY: 108.270 (ask) / 108.284 (bid)
To calculate the bid price of GBP/JPY, you multiply the bid prices of GBP/USD and USD/JPY.
If you get 150.2819, your calculation is correct.
Similarly, to calculate the asking price of GBP/JPY, you multiply the asking prices of GBP/USD and USD/JPY.
Cross pairs allow currency traders to bypass the cumbersome process of converting their currency to USD, achieving more freedom in currency exchange and reducing associated time and cost expenses.
Why Trade Cross Currency Pairs?
Trading cross-pairs offers more opportunities for financial derivatives traders. These currencies aren’t limited to the USD, providing new opportunities through currency crosses and helping traders avoid excessive speculation in the USD.
Another reason traders consider cross-pairs is their increased volatility. Some cross pairs offer more significant market advantages than traditional USD pairs. Specific strategies rely on volatility, and higher market volatility can provide day traders and arbitrageurs with opportunities for round-the-clock trading.
Regarding trading skills, trading cross pairs is much more challenging than trading significant pairs. New traders should carefully consider before engaging in cross-pair trading.
Be cautious of substantial volatility and higher spreads when trading less common cross pairs. Before trading, some cross pairs have higher or lower pip values than significant pairs, so risk analysis is necessary.
