A question that is often asked by beginners to trading is, if we accept that the majority of forex or currency trades include the United State Dollar, why should the trader look at any currency pair that does not include the United States Dollar? The question is valid bearing in mind that over 70 % of the worlds forex trades include the United States Dollar in its currency pair.
First of all a definition. A currency pair that does not include the United States Dollar is known as a cross-currency pair or more simply a cross.
One of the biggest advantages of using cross pairs is that the trader is able to select a one where the movement is perceived to be the greatest. Let us assume that an announcement is being made which has the potential of strengthening the Japanese economy. The obvious first choice of cross would include the US Dollar. However, let us assume that at that particular time, the dollar is also perceived to be strong then this may not necessarily be a good currency pair. Having completed some research the trader realises that recent development in the Great Britain economy are showing that the Great Britain Pound is actually falling in value to other currencies. With the Yen strengthening and the Pound weakening, this may lead the trader to believe that the GBP/JPY currency may be more profitable.
Another factor which may encourage the trader to use a cross pair is the spread on a given currency. The spread is defined as the difference between the buying and selling of a currency. This is expressed as the number of pips (also known as points or ticks). On one cross the spread may be 4 pips on another 2 pips. Now for long-term trading this is less important, but for short-term trades this can make a big difference. Scalping is a trading strategy which looks for multiple short-term low value trades. If a currency pair moves 6 pips, then using the above figures, one currency will provide 2 pips profit, the other 4 pips. That is a 100% difference in profit.
When looking at which currencies therefore to "pair" with each other, the trader should look for those which have high liquidity i.e. where there is most volume and where the spread is kept as small as possible. Traditionally the currencies which have been used for cross-currency pairs also appear as major currency pairs when matched with the United States dollar. These are the British Pound, the Euro, the Japanese Yen, the Australian Dollar, the New Zealand Dollar, the Canadian dollar and the Swiss frank.
The most actively traded cross currency pairs are:
EUR/JPY Japan Euro-yenNZD/JPY Kiwi-yenGBP/JPY Sterling-yenEUR/GBP Euro-sterlingEUR/CHF Euro-SwissAUD/JPY Aussie-yen
Each individual forex trader will have their own trading style. Being able to use cross currency pairs adds an additional tool to use on the road to financial freedom,
Kaz Kowalski has been providing specialist project management support on a number of high profile projects across a variety of industries including Banking, Information Technology, Telecommunications. In his spare time he has been successful in building and running a profitable Home Forex Business which has allowed him the option of reducing the time he spends on providing consultancy services. He has also helped others acquire the basic skills need to be successful traders.
To learn more visit http://www.home-forex-business.com/
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