Why and When a FX Trader should Trade a Cross Currency Pair?

Cross Currency PairFor the past few weeks, I have been talking about cryptocurrencies, block chains, and the crypto trading future thereof. So, let’s take a breather for a couple of weeks now, and talk about some of the FOREX trading strategies that are unique but can reward immensely. We are going to talk about Cross Currency Pair Trading.

Major, Minor, and Exotic Currency Pairs: Take a look at the table on the left. It lists ten currency pairs with six pairs having USD as a base currency. They constitute a segment of the major currency pairs. They typically are paired with USD, and make up for more than 80% of the FX trading market. They also feature high liquidity, and typically the lower spread. Another feature of the so-called majors is the fact that they are highly correlated. In other words, typically these pairs move in tandem. The degree by which these moves occur is defined by statistically computed correlation factor. The correlation factor has a value that ranges from -1 to +1. The -1 value exhibits anti-correlation, while +1 depicts positive correlation.Major, Minor, and Exotic Currency Pairs

The rest of the four pairs constitute the cross currency pairs or minor pairs. Notably, they are not expressed in terms of USD, often offer relatively low liquidity, and are more often than not exhibit trending behavior unlike more volatile behavior of the majors.

There is a third class of currency pairs that is called Exotic Pairs. Some of the examples are: EUR/TRY, Euro/Turkish Lira, or USD/NOK, US dollar/Norwegian Krone. These are traded thinly, have higher spread, and they are fraught with significant risks. Only a skilled trader should risk trading in Exotic Pairs, and that also with a long term view of the investment in mind.

Why and When Trade a Minor Currency Pair? Often the traders have given excuses for NOT trading the minor or cross currency pairs, rather than reasons for trading them. Major currencies are preferred over minor due to their high liquidity, lower spread, and the preferred trading hours.

However, there are reasons why an investor should consider trading cross currency pairs. Some of the scenarios might include:

  • When the trader is pre-disposed to trading trend lines,
  • When one of the currencies in major pairs is dominating and exhibit highly volatile behavior,
  • When the trader wishes to expand his/her portfolio to include some diversity with trading in cross pairs, and
  • Cross trades are also popular among traders who want to arbitrage the spread between the sovereign interest rates offered by two currencies. Conceivably, one can buy the currency with higher interest rate, and short the one with lower interest rate.

Range of Positive CorrelationEvidently, cross pair trading requires a completely different skill set compared to trading in major currencies. The trader mentors at Platinum Trading Institute (PTI), are mindful of risks associated with trading in minor currencies. Our mentors help you understand the factors that impact the price action for a given minor pair, help you devise a strategy that results in a successful trade, and provide guidance to trade in the currencies that exhibit the most profit potential.

 

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Hopefully, you have enjoyed today’s article. Thanks for reading!

Have a fantastic day!

Earnings Disclaimer:

The information you’ll find in this article is for educational purpose only. We make no promise or guarantee of income or earnings. You have to do some work, use your best judgement and perform due diligence before using the information in this article. Your success is still up to you. Nothing in this article is intended to be professional, legal, financial and/or accounting advice. Always seek competent advice from professionals in these matters. If you break the city or other local laws, we will not be held liable for any damages you incur.

By | 2018-06-08T11:51:54+00:00 February 1st, 2018|Forex|Comments Off on Why and When a FX Trader should Trade a Cross Currency Pair?

About the Author:

Dr. Jayesh Mehta
Nationally recognized Advanced Technology leader with over 25 years in the Aerospace Industry. Sustained track record of providing innovative solutions to advancements in the gas turbine and alternate energy fields. Dr. Mehta is an innovator and a passionate financial analyst who has turned his attention now to intricate world of FOREX and Crypto trading education. Academically, Dr. Mehta shares Mr. Nirav Shah’s passion for developing algorithmic strategy based trading approaches for financial instruments applied to FOREX, Crypto, and Equity markets. As a part of his MBA in financial engineering at Xavier University, Dr. Mehta had developed and published several peer reviewed papers on Black-Scholes options models in flagship financial journals.