Maybe you thought trading with regular currencies is no different than cross currency pair trading, but there are significant differences you should know about before you dive into that world. Cross currency trading is a term for every currency trade type that doesn’t involve the U.S. dollar. This makes some different opportunities for traders since the dollar is the most liquid currency.
You would be surprised by how many chances for a fair trade you can create by trading cross currency pairs and major ones. Still, we want to give you the necessary information if you’re going to try this out. That’s why we offer you cross currency pairs to trade and their pros and cons.
Trading Pairs who are highly matching
We know that the U.S. dollar is the most traded currency globally, but you can take advantage of many other currency pairs versus another. When doing that, you should pay attention to global politics. That means countries that are in good relationships economically will have more options and currencies that move together. You can use technical indicators for trading, but you can also pay attention to unexpected world events, which usually give higher volatility.
There is a plus side to this type of trade: liquidity in almost every time zone. That means you can trade with a high chance of success in Asia, New York, or Europe trading hours, even when the New York and London market overlap.
The transaction can be a tricky part.
Making a transaction of a cross pair trade isn’t that simple. Why? Because brokers want to take their chance and do your trade using tight bid-offer spread. Naturally, once you convert the currencies to your own, it will not be of the same value. This means you will have to make a couple of transactions back and forth, which can be a small loss for your account.
Cross Currency Spread
As mentioned above, unlike major currencies and their minimal costs for transactions, other ones can be costly. This happens because the liquidity is much weaker, so you have to pay more to enter or exit a trade. That is, we pay attention to the time zones.
For example, when it’s early in Asia, many European cross currency pairs, including the Canadian dollar, will have very weak liquidity. What brokers usually do is charge a bigger than usual spread so they can create a market that is not liquid in their time zone. Forex brokers make money when the sale and the purchase price is the spread itself, and they make money when the transactions are happening. This is a risk when you are involved in this type of trade. If you can exit the trade with a back to back kind of transaction, there are no worries.
Other risks you should have in mind
Traders will often overlook how stable the U.S. economy is compared to other countries. Remember that you are not trading with the U.S. dollar, so you can’t compare the U.S. economy. Cross pairs are giving you a chance to analyze two different economies, often unfamiliar. This is why you should be well informed economically and politically on a global scale before you start trading cross currency pairs. Once you are into that, you will know what to do and when.
In the end, everything is about information and staying on track. If you are trading some time and are familiar with what is going on with the world, you can try trading cross currency pairs. Their specific liquidity can offer you a variety of opportunities to make money. If you are not interested in the global economy, maybe it’s time you started learning about it. Once you know what is going on, you can try with a small amount of money. You can also pick two random countries connected economically and follow them for a while to see how they are changing. Small steps but still profitable! Be careful of transactions and how many times you have to make them. We mentioned brokers could even take more than they should if they make the time for transactions working for them. Please pay attention to the time of trading and when it’s the right time to enter and exit. This is crucial. Following our advice above, you will be able to exit the market safely, with minimal costs. The chances with the cross currency pairs are endless if you are ready to learn about the world.