Tag: Forex Pairs

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160. What are Currency Crosses and Why Should You Trade Them?

Introduction

Introduction

Introduction

Currency crosses are currency pairs from major and commodity currencies eliminating the US Dollar. Trading cross currency pairs require knowledge of the two countries’ economic conditions, which is not related to the USA.

Major Vs. Cross Currencies

More than 80% of the forex market transactions happen through the US Dollar as it is the reserve currency in the world. Most of the commodities and agricultural products are valued in US dollars.

Therefore, if we want to buy something from a country, we should exchange the currency into the US Dollar to make the transaction. As a result, most of the countries keep the US Dollar as the reserve currency. In particular, China, Japan, and Australia are the largest importer of oil; therefore, they keep a vast number of US Dollars in their central banks.

Because of the massive demand for the US dollar, major currency pairs have a higher trading volume, allowing it to have a decent movement. On the other hand, if we eliminate the US dollar from the major currencies, we will find cross pairs, which is also profitable.

Why Trade Currency Crosses?

Instead of trading at major Dollar based currency pairs, we can profit from trading cross pairs. The most significant features of cross currency pairs are that they are not bound to US Dollars and can make a decent move without any intervention of the US economy.

As a result, many traders trade in currency crosses to diversify their portfolio. Cross pairs can make a decent movement, while dollar-based pairs remain corrective. At that time, it is better to go with the moving market than sit back and watch the corrective price.

Moreover, trading cross pairs might be profitable if the trading session is favorable. For example, we can profit from the GBPJPY pair at Asian and London sessions rather than trading in the US session.

Summary

Based on the above discussion, let’s point the core parts of cross-currency trading:

  • Cross currency trading is similar to major currency trading.
  • There is no US dollar in cross currency pairs.
  • Cross currencies are from major and commodity currencies.
  • Cross currency pair can make a decent move without US session.
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Beginners Forex Education Forex Assets

Quick Start Guide to Exotic Pairs

Currency pairs fall into one of three categories: major, minor, or exotic. Major pairs include the most traded currency pairs and always feature the US dollar. Some examples would include the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Minor pairs, otherwise known as cross-currency pairs, don’t include the US dollar. For example, GBP/JPY or EUR/AUD are both […]

Currency pairs fall into one of three categories: major, minor, or exotic. Major pairs include the most traded currency pairs and always feature the US dollar. Some examples would include the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Minor pairs, otherwise known as cross-currency pairs, don’t include the US dollar. For example, GBP/JPY or EUR/AUD are both […]

Currency pairs fall into one of three categories: major, minor, or exotic. Major pairs include the most traded currency pairs and always feature the US dollar. Some examples would include the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Minor pairs, otherwise known as cross-currency pairs, don’t include the US dollar. For example, GBP/JPY or EUR/AUD are both minor currency pairs. Exotic pairs typically consist of a major currency that is traded alongside a less traded currency, or a currency that comes from an emerging market. Here are some examples of exotic currencies:

  • TRY – Turkish Lira
  • HKD – Hong Kong Dollar
  • JPY – Japanese Yen
  • NZD – New Zealand Dollar
  • AUD – Australian Dollar
  • MXN – Mexican Peso
  • NOK – Norwegian Krone 
  • SGD – Singapore Dollar
  • ZAR – South African Rand
  • THB – Thailand Baht
  • DKK – Danish Krone
  • SEK – Swedish Krona 

You will see exotics traded against currencies like EUR/TRY, USD/HKD, JPY/NOK, NZD/SGD, and so on. These pairs can be more volatile and are not offered for trading by every broker. Some brokers pick and choose certain exotic pairs, while others might offer every exotic, or none at all. You can check your broker’s product list to see what is available.  

You might wonder whether it is a good idea to trade this type of currency. These pairs are undoubtedly more volatile than majors and minors, and we wouldn’t suggest trading exotics if you’re a beginner. Major and minor currencies are less risky because they are attached to stable economies, which are usually moved by interest rates and economic data. Political and economic instability have more of a driving force with exotics. The fact that less traders are trading exotics can also cause more drastic price movements and spreads tend to be wider with these instruments. After all, there’s a reason why many brokers limit their dealings with this type of instrument. 

While trading exotic pairs is risky, these types of instruments might suit one’s trading style in way that other instruments don’t. If you have a lot of experience and understand the market, then it might be worth investing in exotics with a long-term trading plan. On the other hand, traders should remember that you do not have to trade with these just because they exist. Sticking with majors and minors is a much safer option and there is nothing wrong with sticking to basics, especially where money is involved. If you’re determined to trade exotics, we would suggest practicing with a demo account first, so that you’ll be more prepared.

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Forex Assets

Knowing The Fundamentals Of NZD/USD Currency Pair

Introduction

Introduction

Introduction

New Zealand dollar versus the US dollar, in short, is referred to as NZD/USD or NZDUSD. This currency pair is classified as a major currency pair. In NZDUSD, NZD is the base currency, and USD is the quote currency. Trading the NZDUSD is as good as saying, trading the New Zealand dollar, as NZD is the base currency.

Understanding NZD/USD

The value (currency market price) of NZDUSD represents units of USD equivalent to 1 NZD. In layman terms, it is the number of US dollars required to purchase one New Zealand dollar. For example, if the value of NZDUSD is 0.6867, then 0.6867 USD is required to buy one NZD.

NZD/USD Specification

Spread 

The algebraic difference between the bid price and the ask price is called the spread. It depends on the type of execution model provided by the broker.

Spread on ECN: 1

Spread on STP: 1.9

Fees

Similar to spreads, fees also depend on the type of execution model. Usually, there is no fee on the STP model, but there is a small fee on the ECN model. In our analysis, we shall fix the fee to 1 pip.

Slippage

Slippage is the difference between the price asked by the trader for execution and the actual price the trader was executed. Slippage occurs on market orders. It is dependent on the volatility of the market as well as the broker’s execution speed. Slippage has a decent weight on the cost of each trade. More about it shall be discussed in the coming sections.

Trading Range in NZD/USD

The volatility of a currency pair plays a vital role in trading. It is a variable that differs from timeframe to timeframe. Understanding the range (min, avg, max) is essential for a trader, as it is helpful for reducing the cost of each trade.

The volatility gives the measure of how many pips the pair has moved on a particular timeframe. This, in turn, gives the approximate profit or loss on each timeframe. For example, if the volatility of NZDUSD on the 1H timeframe is 10 pips, then one can expect to gain or lose $100 (10 pips x $10 [pip value]) within an hour or two.

Below is a table that depicts the minimum, average, and maximum volatility (pip movement) on different timeframes.

AUD/USD PIP RANGES 

Procedure to assess Pip Ranges

  1. Add the ATR indicator to your chart
  2. Set the period to 1
  3. Add a 200-period SMA to this indicator
  4. Shrink the chart so you can assess a large time period
  5. Select your desired timeframe
  6. Measure the floor level and set this value as the min
  7. Measure the level of the 200-period SMA and set this as the average
  8. Measure the peak levels and set this as Max.

NZD/USD Cost as a Percent of the Trading Range

With the volatility values obtained in the above table, the total cost of each trade is calculated on each timeframe. These values are represented in terms of a percentage. And these percentages will determine during what values of volatility it is ideal to trade with low costs.

The total cost is calculated by adding up the spread, slippage, and trading fee. As a default, we shall keep the slippage at 2 and the trading fee for the ECN model at 1.

ECN Model Account

Spread = 1 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 1 + 1 = 4

STP Model Account

Spread = 1.9 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.9 + 0 = 3.9

The Ideal Timeframe to Trade NZD/USD

The very first observation that can be made from the above two tables is that the total costs in both the model types are more or less the same. So trading on any one of the two accounts is a fine choice.

From the minimum, average, and maximum column, it can be ascertained that percentages (costs) are the highest on the minimum column of all the timeframes. In simpler terms, when the volatility of the currency pair is very low, the costs are usually on the higher side. Conversely, when the volatility is high, the costs are pretty low. Hence, it is ideal to trade during those times of the day when the volatility of the pair is at or above average. For example, a day trader can trade the 1H timeframe when the volatility of the currency pair is above 8.8 pips. This will hence assure that the costs are pretty low.

Another way to reduce the costs is by nullifying the slippage. This can be done by placing a limit order instead of executing them by a market order. This shall reduce the total costs by a significant percentage. An example of the same is given below.

Total cost = Slippage + Spread + Trading fee = 0 + 1 + 1 = 2

From the above table with nil slippage, it is evident that the costs have reduced by about 50%. Hence, to sum it up, to optimize the cost, it is ideal to trade when the volatility is above average and also enter & exit trades using limit orders rather than market orders.