The foreign exchange market, also known as the forex market, is the largest financial market in the world. It involves the buying and selling of different currencies with the aim of making a profit. Forex traders often deal with major currency pairs such as EUR/USD, GBP/USD, and USD/JPY. However, there are also cross pairs in forex that traders can trade. In this article, we will discuss what cross pairs are and how they work.
What are Cross Pairs?
Cross pairs or cross currency pairs are currency pairs that do not involve the US dollar. In other words, they are pairs that are not quoted against the US dollar but rather against another major currency. Cross pairs are also known as minor currency pairs or simply minors.
For example, the EUR/JPY is a cross pair because it is the exchange rate between the euro and the Japanese yen. The GBP/CHF is another cross pair because it is the exchange rate between the British pound and the Swiss franc.
How do Cross Pairs Work?
Cross pairs work in the same way as major currency pairs in forex. Traders can buy or sell a cross pair depending on their market analysis and trading strategy. For example, if a trader believes that the euro will appreciate against the Japanese yen, they can buy the EUR/JPY cross pair. On the other hand, if they believe that the euro will depreciate against the Japanese yen, they can sell the cross pair.
The main difference between cross pairs and major currency pairs is that the former may have wider spreads and lower liquidity. This means that traders may have to pay a higher price to enter a trade and may experience slippage when exiting a trade. However, this is not always the case, and some cross pairs can have tight spreads and high liquidity depending on market conditions.
Why Trade Cross Pairs?
There are several reasons why traders may choose to trade cross pairs instead of major currency pairs. One reason is that cross pairs can offer more trading opportunities and diversification. For example, if a trader is bullish on the euro but does not want to trade the EUR/USD pair, they can trade the EUR/JPY, EUR/GBP, or EUR/CHF cross pairs.
Another reason is that cross pairs can have lower volatility compared to major currency pairs. This can be beneficial for traders who prefer a more stable market and want to avoid sudden price movements.
Lastly, cross pairs can offer higher profit potential compared to major currency pairs. This is because cross pairs may have wider price ranges and larger price movements, which can result in bigger profits if traded correctly.
Conclusion
In conclusion, cross pairs are currency pairs that do not involve the US dollar and are quoted against another major currency. They work in the same way as major currency pairs and can offer more trading opportunities, diversification, lower volatility, and higher profit potential. However, traders should be aware of the potential risks associated with trading cross pairs, such as wider spreads and lower liquidity. It is important to conduct thorough market analysis and develop a sound trading strategy before trading any forex pair, including cross pairs.
