Cross Currency Pair Trading in the Forex Markets
Updated: Sep 15, 2020
The retail foreign exchange market is booming as traders discover the benefits of participating in the world’s biggest financial market via online margin trading platforms. These platforms provide us with a level of access to the FX market that was simply impossible for all but the largest international banks and institutions just a few years ago. These days, it does not matter who you are or where you live, if you have access to the internet you have the ability to trade the foreign exchange market right alongside the biggest financial institutions in the world. The top 3 currency pairs account for nearly 60% of all FX market activity, again, far outstripping the turnover of the approximately 38,000 individual securities traded on the world’s stock exchanges.
FX trading always involves the simultaneous exchange of two different currencies. The two currencies involved in any particular transaction are known as a ‘pair’, such as USD/JPY, EUR/USD or AUD/USD. Whenever one currency is bought, the other currency in that pair is, by default, sold.
The best way to trade the financial market is to gain an edge over the markets.
This means putting the odds in our favour, which would increase the probability of a successful trade. One of the simplest ways to do this is to ascertain the trend of a particular currency by comparing it to its other related pairs. This is because a strong trend in a particular currency pair would generally mean that it is strong against the other currencies too.
For example, an up trending EUR/USD would probably mean a strong EUR/GBP, and so also the EUR/JPY. While this would hold true most of the time, it is not a rule and hence cannot be counted upon as a confirming factor. More than a simple correlation like this, a much deeper relationship between a currency pair, and its cross related pairs would give a better confirmation. What I have found more effective is to confirm the trend of a currency by looking for similar signs on its cross pairs. If a currency exhibits similar trends with a major and a cross pair, it is a safe trade.
But what about the time, when these two factors are not confirming? This kind of situation, in fact, provides excellent trading opportunities, as we can derive important clues from here. If this sounds confusing, bear with me, as we will go over it step by step.
The best example for this strategy would be the AUD. This is because it is traded actively with the USD – the AUD/USD and its cross - the AUD/NZD is also very actively traded and has high volatility. The objective of the strategy is to derive clues from conflicting situations of the AUD. We will compare all the currencies on the same time frame, and we first look at the Daily charts of the AUD/USD and the AUD/NZD, which are overlaid for comparison.