One of the fundamental concepts frequently used by both beginner and professional investors developing trading strategies in the forex markets is "cross currency." This term is generally used to describe currency pairs that do not contain the USD.
Popular currency pairs such as USD/EUR, USD/JPY, and USD/GBP are not considered cross currencies. However, currency pairs such as EUR/JPY, GBP/CHF, and AUD/NZD can be considered the most popular examples of "cross currency pairs."
Because the USD is one of the most reliable currencies in terms of liquidity, it is a forex currency with less volatility.
Therefore, traders seeking short-term returns often engage in "forex cross currency" transactions.
Furthermore, taking action in the forex markets without relying on the USD can offer freedom in various ways. You can discover all types of cross currency pairs via BlueSuisse now! Open your live trading account and start your forex journey today.
Understanding Cross Currency in Forex
For beginner investors in particular, grasping forex dynamics can require sufficient knowledge and experience in a variety of areas.
One of these areas requiring a high level of proficiency is "Understanding cross currency in forex."
If a forex trader properly understands the workings and potential impacts of cross currencies, their profitability will be high. This is because these pairs lack the USD, and fluctuations are more frequent.
Investors with short-term financial goals often choose cross currencies in leveraged transactions. Investors of different skill levels need to understand the workings of these pairs to develop the most profitable cross currency strategies.
For example, it should be remembered that all political and economic relations, agreements, and disagreements between the European Union and the UK influence the EUR/GBP, one of the most popular cross currency pairs.
This allows for more accurate predictions about cross currency pairs by monitoring the dialogue between the UK and the EU, as an example of fundamental analysis.
This analytical skill can be considered one of the key advantages of cross currency trading in forex.
What is a Cross Currency Pair?
For a beginner forex trader, the definition of "cross currency pair" can be simplified as follows:
Currency pairs that do not contain the USD are referred to as cross currency pairs in the forex markets.
The most popular ones can be listed as follows:
- EUR/GBP
- EUR/CHF
- AUD/NZD
- GBP/CHF
When examining these examples, it will be noticed that the USD is an ineffective currency in affecting the value of these pairs.
While it is known that the USD occasionally influences the value of these currency pairs under specific market conditions, it can be argued that there is no direct correlation. Volatility is generally higher in these pair types without the USD.
This can make it easier for investors to achieve short-term returns independent of the USD. To trade cross currency pairs independently of the USD's low volatility, you can start your forex journey in minutes right now through BlueSuisse.
How Cross Currency Transactions Work?
One of the key ways to achieve the most effective results in cross-currency trading is to understand how cross-currency transactions work.
We can explain this process with a simple example. Let's say you have Japanese yen (JPY) in your portfolio and plan to buy Euros.
Then you should manage this transaction using the JPY/EUR pair. This operating mechanism eliminates the need to convert USD. This system offers many advantages and opportunities for forex traders.
The most crucial ones are:
- Time efficiency
- Low costs
- Fast execution
- Potential to meet short-term expectations
How to Calculate a Cross Exchange Rate?
In the cross currency trading process, investors are expected to calculate the cross exchange rate. This calculation may seem complex and difficult at first glance, but a few simple tips are sufficient. Let's assume the EUR/USD pair is 1.2 and the USD/JPY pair is 110.
To find the EUR/JPY pair, which is a popular example of a cross currency pair, we multiply 1.2 by 110. According to this equation, 1 Euro is worth 132 Japanese Yen (JPY).
Investors can use this simple equation to support their forex cross currency transactions while implementing trading strategies independent of the USD.
Some forex broker platforms with advanced digital infrastructure, such as BlueSuisse, offer developer tools that allow you to automatically calculate the cross exchange rate. To learn more about the market rates, open your demo account with BlueSuisse.
Benefits of Trading Cross Currency Pairs
Forex traders of all skill levels can find numerous benefits of trading cross currency pairs.
The most prominent of these can be summarized as follows:
- Implementing diversification strategies: Portfolio diversification can be achieved not only with the USD but also with various currencies.
- Greater opportunity potential: Global developments directly impact cross currency pairs.
- Capitalizing on arbitrage returns: Differences between currency pairs can generate returns in short-term buy-sell transactions. However, the risk-return balance should be considered.
If you want to experience the opportunities offered by cross currency pairs in your portfolio, you can start trading now through BlueSuisse.
The biggest opportunity offered by cross-currency trading is high volatility. Since the USD is a currency whose value fluctuates frequently, it's unlikely to be feasible to capitalize on short-term differences in USD-based currency pairs.
Risks to Consider When Trading Cross Currency Pairs
Although the advantages of cross-currency trading in forex are numerous, it's important to remember that there are also risks.
Liquidity is the most significant risk. Unlike major currency pairs like the USD, it involves currencies that are subject to greater volatility.
Furthermore, trading currencies less popular than the USD can create liquidity problems in the medium term during trading. Another common risk is high spreads. Spreads can sometimes increase significantly under specific market conditions.
Traders should keep this possibility in mind when trading cross-currency pairs. These risk factors are key elements investors should keep in mind when developing cross-currency strategies all the time.
Cross Currency in Forex Trading Strategies
Cross currency in forex trading strategies can be listed as a strategy that combines many different approaches and techniques.
The most common of these is generally the carry trade strategy. In this model, long-term returns are targeted based on interest rates set by two different central banks.
To achieve this goal, borrowing is done in the currency found in the lower-interest-bearing cross currency pair.
Additionally, fundamental analysis-based strategies can be considered, which develop strategies based on the relationships, agreements, and conflicts between two different countries.