Benefits of Trading Forex on Cross Currency Pairs
Opportunities and earnings of trading profits on the cross currency pair can be greater than the major currency pairs, if you are observant.
News reports and technical analysis on trading sites mostly talk about the movement of major currency pairs (FX majors). This information is indeed very useful to know which currencies are strong and which are weak, but by only paying attention to the major currency pairs, your trading opportunities will be limited. Most traders are interested in major currency pairs such as EUR / USD, USD / JPY and GBP / USD. This is understandable because most news, predictions and analysis always refer to the major currency pairs.
As in the spread of FXCM’s brokerage clients in the picture above, the most trader concentration is in the EUR / USD pair, around 30%, the Gold-US Dollar or XAU / USD around 15%, GBP / USD and USD / CHF around 10%. The other major currency pairs are USD / JPY, AUD / USD, NZD / USD and USD / CAD, between 5 to 7%. Cross currency pairs that do not involve USD are below 5%.
The imbalance of the spread is due to the many traders taking the current in determining the currency pair for trading regardless of the odds of cross currency pair seen from fundamental and technical analysis.
Advantages of Cross Currency Pairs
If you look at the strength index of a currency (strength index) at a time like the picture below (source: DailyFX), then you can choose to trade on the weakest versus the strongest currency pair, not the weak versus weak or strong versus strong. And the pair does not have to be a major currency pair.
Strong weakness of a currency is caused by the level of demand and supply compared to other currencies, and this is often influenced by the monetary policy or interest rates of the central bank of the country’s currency. As with the USD / JPY pair, JPY rebounded from October 2013 to January 2014, but the gains were stuck at 100.72 level at the start of February 2014, and again looked weaker. At the same time USD also tends to weaken.
While there has not been a clear driver for USD strengthening since early January, EUR and GBP tend to strengthen. For a swing trader who tends to follow the direction of the trend (trend following) to reap profits, it will be more interested to enter the EUR / JPY or GBP / JPY pair rather than USD / JPY or EUR / GBP, namely by considering a strong versus weak currency . The following is a comparison of pip gains between USD / JPY versus EUR / JPY in the same time period when the USD and EUR both gained against the JPY. This happened because EUR at that time was indeed stronger than USD.
Another example is the AUD / CAD currency pair. If you look at the deployment image of the client on the FXCM broker above, this currency pair is not listed or the percentage of trading on this pair is below 3%. But if you look at both fundamental and technical analysis, this currency pair is interesting enough to trade. In terms of fundamentals, Australian employment data is good and Canada is disappointing, and from a technical perspective, the strong psychological resistance level of 1.0000 is being broken.
After the psychological support level of 1.0000 is broken (point A) and turns into resistance, this level is prone to be broken again. The likelihood of an uptrend move is quite large considering the AUD is strengthening against the USD and the CAD is being weakened against the USD. If you have a buy position, the exit target can be at level 1.0300 which coincides with the 100% level of Fibonaaci expansion.
Opportunities and gains in trading profit on the cross currency pair can be greater than the major currency pairs if you are observant of the potential of each currency through fundamental and technical analysis. For the spread is relatively larger than the major currency pairs, but what does it mean if the spread is high if you are sure to make a profit?