Currency Cross Pairs and Why Trade Them

by Jena Shepherd | June 5, 2018 9:36 am

Long ago, when foreign exchange traders wanted to change their currency to another currency, they had to first convert it into the US dollar. After it’s converted into dollar, that’s the time when they can convert it to their real desired currency.

But that was long ago, and nowadays traders can exchange their currency to any currency they want without having to exchange their money first to dollars.

Currency crosses have been invented for Meta Trader 4[1] individuals to forego the process of converting their currencies to US dollars first. Thanks to these crosses, they can convert their money directly into whatever currency they want.

The Importance of the US Dollar

Since the US dollar is the reserve currency of the world, more than 80 percent of the transactions in the forex market have the dollar Funding Methods[2] on its back.

Most agricultural and commodities like oil have prices denominated in the US dollar. If one country wants to buy oil or other agricultural goods, it would have to first convert its currency into US dollars before they can buy the goods.

Many countries keep a reserve of the US dollar on hand so that they can make purchases much faster with the bucks accessible.

The more a country needs the dollar, the bigger its dollar reserve should be. For instance, China is one of the heaviest oil importers. Now, China has more than 3 trillion US dollars in its reserve stockpile.

This makes the dollar very much important for forex traders. All major currency pairs and commodity pairs are tied to the dollar, so traders always keep close tabs on whether the dollar will be weak or strong.

More Opportunities with Cross Pairs

Currency crosses provide more currency pairs for you, which basically means more chances to find profit-making trades.

Since currency crosses are not bound by the dollar, you can give yourself more options for trading chances, possible having different price movement behaviour.

You also give yourself a chance to be neither anti-dollar nor pro-dollar, which are basically the only two sides you’d be trading if you traded major currencies.

Currency Crosses Have Smoother Trends

Since the majority of the forex market trade with the US dollar, it’s easy to imagine that many of the reported news will make US dollar-based currency pairs to move erratically.

What this implies is that you will certainly see some spikes on the charts even if there is an emerging trend. As a result, you will find it difficult to spot a trend or range indications.

For the case of currency crosses, they can generally offer a smoother trend without as many spikes as those with the US dollar.

This makes the currency cross pairs a better choice for traders who love to ride or follow the forex market trends. It will be easier for you to spot a trend and find ideal entry points since you know that these technical levels hold more than they do for the majors.

Endnotes:
  1. Meta Trader 4: https://fhbc.com/trading/trading-platform/
  2. Funding Methods: https://fhbc.com/trading/funding-methods/

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