Cross Rate Trading. Features. Anton Hanzenko.
Trading on cross-rates, according to a variety of beliefs, refers to the highest level of trading and is only available to traders with extensive trading experience. But, along with this, trade on crosses obeys the same laws as the main currency pairs, only with small features. And today we will talk about them.
Cross-rate is a currency pair, a trading instrument that does not contain the US dollar (USD). But, despite this, the ratio between the two currencies is determined in relation to the US dollar. All cross-rates are calculated in relation to the American currency, despite the fact that the American dollar does not appear in the title. For example, EUR/USD and USD/JPY currency pairs are used to calculate the EUR/JPY pair.
Formulas for the calculation of cross-rates are the following:
X/Y = (X/USD) * (USD/Y) or X/Y = (USD/Y) / (USD/X).
For example: EUR/JPY = EUR/USD * USD/JPY;
GBP/JPY = GBP/USD * USD/JPY;
EUR/GBP = (EUR/USD) / (GBP/USD), etc.
Trade on cross-rates. Features:
Due to the peculiarities of calculations, trading on cross-rates has some unusual features that manifest themselves in the process of trading.
- High Volatility
Some cross-rates are highly volatile, which allows you to earn a very impressive profit in a relatively short time while observing rises. Crosses containing the currencies Euro (EUR) and Yen (JPY) are highly volatile. Recently, similar properties are also demonstrated by the British Pound (GBP). In such pairs, intraday volatility may exceed 200 points. Very calm in terms of volatility is the pair EUR/CHF, which is caused by the similarity of the EUR/USD and USD/CHF pairs.
- Reaction to news
Cross-rates significantly react to news on this or that country. So, the above mentioned cross EUR/CHF reacts well to the data on Switzerland, when the main pair USD/CHF can hardly react on these data. In addition, the impact of some news may have a more significant effect on certain crosses than on the main pairs.
- Carrytrade
Carrytrade is an opportunity to earn on the difference in interest rates of central banks of different countries due to their cross-rates. This is a very extensive topic, which will be discussed in the following articles.
- Cross-rates as an indicator
Cross-rates, as an indicator, is also a very voluminous topic, which can be discussed about for a long time. The dynamics of cross-rates significantly influences the dynamics of major currency pairs. Due to the growing popularity of a currency, traders are beginning to buy a certain asset, going out of others. And this can not but affect the US dollar.
So, with the growth of inflation in the euro area, the market starts buying up euros for pounds, francs, yens and so on, which in turn supports the EUR/USD. Even if inflationary pressures in the US are higher than in the euro area, the notion of “support” arises in cross-rates. A similar situation develops with other currencies, when they receive significant fundamental support.
- Price point
Most cross-rates have a higher price point than the main currency pairs, which must be taken into account when calculating the lot and drawing up risk management. Since the cost of one item in the crosses can be several times greater than in the main pairs.
Trading on cross-rates contains some nuances that you can use for yourself. In addition, the development of cross-rates multiplies the number of instruments, and with it rises the opportunities for earning.
P.S. earlier, the article “Government bonds as a leading indicator of the foreign exchange market” was published in the trader’s blog. The approach described in the article excellent shows itself on cross-rates!
Hanzenko Anton