Why Trade Crosses?

You should try to learn forex trading using a proven and tested forex system. It is of utmost importance for you as an individual trader to find the right currency pair to trade. As an individual/retail trader, you will only have $5,000 to $10,000 as equity in your trading account. Opportunity cost is a real cost for you as an individual trader. If you commit your funds to anyone position, those funds cannot be used in other possibly more profitable trades.

In forex markets, every currency pair is linked to the other one way or the other. As a trader if you adopt a dollar centric view, you risk missing promising trades and opportunities offered by other currency pairs.

Most of the trading is done through the direct buying/selling of US dollar. You should always keep an eye on the crosses in order to gauge the strength/weaknesses of a currency. This will tell you which currency pair is the best to trade.

What are the crosses, you may ask? Currency pairs that do not involve the dollar are known as Crosses such as EUR/AUD, CHF/GBP, EUR/JPY, EUR/GBP etc. Almost 90% of the currency pairs that are actively traded in the forex markets involve the US dollar. In simple terms, over 90% of the all the currency trades have US Dollar on one side of the trade. So what is so special about a cross?

Let’s make it clear. A reasonable way to trade equities is to trade from big to small. Suppose, you determine that the stock market is expected to rise. But since you have limited funds as individual investors, you need to choose your stocks carefully.

It would be advisable to look at the sector specific indices and find the most promising sector. From there, you would look within the index and find the most promising companies that are expected to perform well over the coming months. This big to small thinking is very solid and you need to think in the same fashion while trading forex.

Cross movements should never be overlooked as they can often hide the footsteps of large players. For example, a major investor may be bullish on Euro due to some fundamental reasons. He may try to fly under the radar and buy Euros against Pound Sterling, Swiss Francs, and Yen etc.

Crosses are extremely important to swing or momentum traders! They are used as forecasting tools to predict which currencies lead the pack. Ignore the crosses and you will be often stuck with currency pairs that do not move much.

With limited funds, you should always try to choose the currency pair that is expected to move the most. But, how exactly you come to a reasonable conclusion? By looking at the crosses!

Cross movements either work to amplify the move or minimize the effects. For example, if Euro is dropping against US Dollar but rising against the Pound, the net effect would be to limit the size of the EUR/USD fall. When ERU/GBP is rising, it is telling us that the Euro is outperforming the Pound.

Since you have limited funds, which currency pair to chose? Any EUR/USD selling pressure is likely to be offset by the rebounding cross EUR/GBP. GBP/USD sales will likely to be amplified by the cross sales EUR/GBP.

Since, EUR/GBP is rising; it is a better bet to short Pound instead of Euro. This means you should choose the pair GBP/USD. If we had randomly picked one of the two currency pairs for shorting, we may have missed a great trade.

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