Forex trading is the buying and selling of currencies in pairs. The value of a currency is determined by its exchange rate with another currency. Cross currency pairs are those that do not involve the US dollar. In other words, it is a pair of currencies that are not traded against the US dollar. If you are a US dollar trader, you will need to calculate cross currency pairs to trade other currencies.
Calculating cross currency pairs can be a bit tricky for beginners, but it is a crucial skill to have as a trader. To calculate a cross currency pair, you will need to use the exchange rates of the two currencies involved in the pair. For example, if you want to trade the Euro against the Japanese Yen, you will need to use the exchange rate of the Euro against the US dollar and the exchange rate of the Japanese Yen against the US dollar.
To calculate a cross currency pair, you will need to follow these steps:
Step 1: Identify the two currencies in the pair
In this case, we are using the Euro and the Japanese Yen. The Euro is the base currency, and the Japanese Yen is the quote currency.
Step 2: Convert the base currency into US dollars
Since you are a US dollar trader, you need to convert the base currency (Euro) into US dollars. To do this, you will need to use the exchange rate of the Euro against the US dollar. For example, if the exchange rate is 1.1000, it means that one Euro is worth 1.1000 US dollars.
Step 3: Convert the quote currency into US dollars
Next, you need to convert the quote currency (Japanese Yen) into US dollars. To do this, you will need to use the exchange rate of the Japanese Yen against the US dollar. For example, if the exchange rate is 0.0090, it means that one Japanese Yen is worth 0.0090 US dollars.
Step 4: Divide the base currency value by the quote currency value
Now that you have the values of both currencies in US dollars, you need to divide the base currency value by the quote currency value. In this case, you would divide the Euro value by the Japanese Yen value. For example, if the Euro is worth 1.1000 US dollars and the Japanese Yen is worth 0.0090 US dollars, the cross currency rate would be 122.22.
The formula for calculating a cross currency pair is:
Cross currency rate = (Base currency rate / US dollar rate) / (Quote currency rate / US dollar rate)
In the example above, the Euro/US dollar rate is 1.1000, and the Japanese Yen/US dollar rate is 0.0090. So the cross currency rate would be:
Cross currency rate = (1.1000 / 1) / (0.0090 / 1) = 122.22
This means that one Euro is worth 122.22 Japanese Yen.
Conclusion
Calculating cross currency pairs can be challenging, especially for beginners. However, it is an essential skill for any trader who wants to trade currencies other than the US dollar. By following the steps outlined above, you can calculate cross currency pairs and make informed trading decisions. Remember to always double-check your calculations and stay up-to-date with the latest exchange rates to trade successfully in the Forex market.
