When it comes to trading in the forex market, there are a variety of currency pairs that traders can choose to trade. The most commonly traded currency pairs are those that involve the US dollar, such as EUR/USD, GBP/USD, and USD/JPY. However, there are also a number of cross pairs that traders can trade. These pairs do not involve the US dollar and instead involve two other major currencies. In this article, we will explore what cross pairs are in forex and why traders might choose to trade them.
What are cross pairs in forex?
Cross pairs, also known as minor pairs, are currency pairs that do not involve the US dollar. Instead, they involve two major currencies, such as the euro, yen, or pound, for example. Some examples of cross pairs include EUR/GBP, EUR/JPY, and AUD/NZD.
Why trade cross pairs?
There are several reasons why traders might choose to trade cross pairs. One of the main reasons is diversification. By trading a variety of currency pairs, traders can spread their risk and potentially reduce their overall exposure to any one particular currency or market.
Another reason why traders might choose to trade cross pairs is that they can provide opportunities for profit. Some cross pairs may exhibit unique price patterns or trends that can be exploited by traders. Additionally, cross pairs may offer tighter spreads or lower trading costs compared to more commonly traded currency pairs.
Finally, trading cross pairs can also be a way to take advantage of currency movements in specific regions or economies. For example, traders who are bullish on the eurozone economy may choose to trade EUR/JPY instead of EUR/USD, as the latter may be more heavily influenced by US economic data.
Factors to consider when trading cross pairs
When trading cross pairs, there are several factors that traders should consider. One of the most important is liquidity. Some cross pairs may have lower trading volumes compared to more commonly traded currency pairs, which can make it more difficult to enter and exit trades at desired prices.
Another factor to consider is volatility. Cross pairs may be more volatile than major currency pairs, which can increase the risk of large price swings and potential losses. Traders should be aware of this and adjust their position sizing and risk management strategies accordingly.
Finally, traders should also be aware of any economic or political events that may impact the currencies involved in the cross pair. For example, news of a potential interest rate hike in the eurozone may cause the euro to appreciate against other currencies, including the Japanese yen in the case of EUR/JPY.
Conclusion
In summary, cross pairs are currency pairs that do not involve the US dollar and instead involve two other major currencies. Traders may choose to trade cross pairs for a variety of reasons, including diversification, profit opportunities, and exposure to specific economies or regions. When trading cross pairs, traders should consider factors such as liquidity, volatility, and economic or political events that may impact the currencies involved. By understanding these factors, traders can make informed decisions and potentially profit from trading cross pairs in the forex market.
