Forex: When to Trade The Crosses

7 ส.ค.

In Forex trading, the major currency pairs—such as EUR/USD, GBP/USD, and USD/JPY—typically capture the spotlight with their high trading volumes and substantial liquidity. However, there are times when the most compelling trading opportunities emerge not in these major pairs but in the less frequently traded cross currencies—pairs that do not include the US dollar.

Majors vs. Crosses

Major Forex Pairs: These pairs, including the likes of EUR/USD, GBP/USD, and USD/JPY, are known for their high liquidity and often provide stable trading opportunities. Their popularity ensures lower transaction costs, making them ideal for traders seeking high frequency and reduced costs.

Cross Currencies: Cross currencies, or "crosses," are pairs that exclude the US dollar, such as EUR/GBP, EUR/AUD, and GBP/JPY. Although these pairs may not attract as much attention as the majors, they can present unique trading opportunities, particularly when the US dollar is stable or moving sideways.

Why Trade The Crosses?

• Diverse Opportunities: Cross currencies can highlight relative strengths and weaknesses between two non-USD currencies, potentially revealing more pronounced trends than those found in major pairs.

• Potential for Higher Volatility: Crosses often experience heightened volatility, especially when the involved currencies come from different economic regions with varying policies or geopolitical developments.

• Different Market Dynamics: Without the influence of the US dollar, cross currencies react differently to market news and economic reports. This differentiation can be advantageous when major currencies are consolidating or showing low volatility, providing more pronounced movements in cross pairs.

When to Trade The Crosses

One effective approach to identifying optimal times to trade cross currencies is to use major Forex pairs as a reference. Since major pairs account for the majority of global trading volume, their behaviour has the potential to offer better insights than simply viewing the crosses in isolation.

Here’s how you can use major pairs to pinpoint trading opportunities in cross currencies:

1. Rank Currency Strength

Start by assessing the strength of each major currency involved in your cross currency pairs. By analysing the performance of major pairs, you can determine which currencies are strong or weak relative to one another. For example, if AUD is strong against the USD, but USD is strong against GBP, AUD/GBP may be showing a cleaner trend than AUD/USD. Ranking the strength of each currency helps identify which cross pairs are likely to present the best trading opportunities.

2. Watch for USD Neutrality

When the USD is neutral—meaning it is neither particularly strong nor weak compared to other currencies—cross currencies can become more attractive for trading. In such scenarios, the relative strength or weakness of non-USD currencies becomes more apparent, offering clearer trading signals in cross pairs. For instance, if the USD is stable, you might find more pronounced trends in pairs like EUR/GBP or EUR/AUD.

3. Identify Technical Catalysts

Analyse major pairs for technical patterns or key levels that can signal potential moves in cross currencies. Look for breakouts, trend reversals, or significant support and resistance levels in the major pairs. For example, if GBP/USD shows a breakdown below a major support level while USD/JPY is about to test a major area of resistance, the resulting technical signals may suggest that pairing GBP against JPY (GBP/JPY) could offer a more compelling trading opportunity.

By using major Forex pairs as a reference, you can gain valuable insights into cross currency movements, making it easier to identify and capitalise on the most promising trading opportunities.

Recent Example: EUR/JPY

To illustrate the potential of trading cross currencies, consider the period from July 17th to July 23rd. During this time, EUR/USD exhibited a downward movement, breaking below a key ascending trendline on the hourly chart. This technical signal indicated weakness in the Euro (EUR) and strength in the US Dollar (USD).

EUR/USD Hourly Candle Chart

Past performance is not a reliable indicator of future results

Rather than simply trading EUR/USD short, we can check the other major pairs to see if there is potentially a stronger currency to pair EUR against. USD/JPY’s price chart showed a topping pattern and began moving lower, signalling that the Japanese Yen (JPY) was strengthening relative to the USD. This divergence suggested that pairing EUR weakness against JPY—rather than USD—might yield a more pronounced trading opportunity.

USD/JPY Hourly Candle Chart

Past performance is not a reliable indicator of future results

As a result, from July 23rd onwards, EUR/JPY experienced a significant decline of nearly -5%, whereas EUR/USD only fell by less than -1%. This example demonstrates how analysing major pairs can help identify stronger trading signals in crosses.

EUR/JPY Hourly Candle Chart

Past performance is not a reliable indicator of future results

Conclusion

Understanding when to trade the crosses can open up a range of new opportunities in the Forex market. By leveraging the analysis of major pairs, traders can gain valuable insights into the strength and weakness of various currencies, enabling them to make more informed trading decisions. Whether you're seeking higher volatility, diverse opportunities, or smoother trends, trading the crosses can be a valuable addition to your trading strategy.

Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.

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