Using cross rates for effective trading - how effective is it?
This article is intended for experienced traders who understand what cross rates are and how they are formed. Here we will consider the main points worth paying attention to when trading crosses, as well as some of the benefits that can give us cross rates when trading the major currency pairs (majors).
First of all, of course, cross rates are additional trading tools and therefore additional trading opportunities, especially if you have a trend following trading system. Due to the peculiarities of the rate formation such currency pairs as EUR/JPY, GBP/JPY react to the news background related to the US dollar more smoothly and with a smaller number of false outflows. Recognition of emerging trends by technical indicators is more accurate. The trends themselves, as a rule, are longer in time and larger in scope.
Cross rates allow a more flexible way to earn on the difference between the interest rates of central banks of different countries (carrytrade). That is, when you open a position in a certain direction, you can earn on a positive swap. This is a rather complicated and deep theme, which does not allow us to fully cover it in this article.
The most popular and liquid currencies are cross rates related to the Euro and Yen. EUR/JPY has a high volatility almost around the clock, it moves perfectly during the Asian, European and American sessions. EUR/CHF is strongly reacting to the news background from the Eurozone and Switzerland, and EUR/GBP from the UK. GBP/JPY, NZD/JPY and AUD/JPY are attractive, which we analyzed above. The CAD/JPY has an almost 90% correlation to oil prices, since Canada has the second largest oil reserves and Japan is one of the biggest consumers. As you can see the choice is huge.
The next point is the use of cross rates in trading the major currency pairs. Suppose you have a clear understanding of the market, and you want to take a short position on the U.S. dollar, but you don't know what currency pair to do it on, the trading system gives a buy signal on both EUR/USD and GBP/USD. In this case, just look at the cross EUR/GBP, if it's decreasing it means that at the moment the pound is a stronger currency than the euro and it's more preferable to buy GBP/USD, if the cross EUR/GBP is increasing, the euro is a stronger currency than the pound and your choice is to buy EUR/USD. Also it is worth noting that despite the fact that the main trading volumes occur at "majors", when the crosses break through strong support or resistance levels and correspondingly, a sharp increase in volatility, the crosses rates can affect the dynamics of the major currency pairs in the short term. For example, EUR/JPY can at certain moments have a short-term effect on EUR/USD.
The last point worth paying attention to is that cross rates have a different value of one pip of price change than the majors, on the basis of which they are formed. You must take it into account in your risk-management.