This article looks at the use of cross FX rates when you trade on the forex market.
When you look at trading forex you will see the term cross currency rates. It is important that you understand what cross currency FX rates are and how they affect the trading that you complete. You should look at the unique characteristics of the cross FX rates and how you can trade with them.
What are Cross FX Rates?
The first point you need to look at is what cross FX rates are. When you trade on the market you are going to be using currency pairs. 80% of all trades are completing with currency pairs that have the US dollar in them. However, when you use a currency pair that does not have the US dollar then you are going to be using a cross FX rates currency pair. Any currency pair that you use that does not have the US dollar in it is considered to be a cross currency pair whether it is the Australian dollar and British pound pair or the Australian dollar and Euro pair.
The Unique Characteristics of Cross Rates
There are a number of unique characteristics that cross rates have that you should know about. The first is that you will not have to worry about the US dollar at all when you trade with these FX rates. This is due to the fact that the US dollar is not part of the cross rates.
The second characteristic is that cross rates are generally less liquid than traditional pairs. This is due to the fact that the US dollar is the most liquid currency on the market and the lack of this currency in the rates lowers the overall liquidity. This can be a good and bad thing for traders. When you have lower liquidity you will not have the stability and predictability on the market that you may need. However, there are certain trading strategies that can only be used when you are looking at low liquidity currency pairs. The spreads will also be wider when you look at these currency pairs.
Trading with the Cross Rates
There are many traders who look at using the cross rates to trade. It is possible to use cross rate currency pairs to trade with any strategy. Of course, you should be careful with the currency pairs that you choose because they still need to suit the strategy that you are using.
There are many traders who find it easier to trade with the cross rate currency pairs because you can determine the dynamics of the currency pair easily. With cross currency pairs you can determine which currency is the strong and which is the weak with greater ease. The movements that you find with these currency pairs also allow you to use contrarian options on the market.
By trading with the less closely watched sector of the forex market that is the cross rates you are able to make greater profits. There are many cross currency pairs that offer high fluctuations that you are able to take advantage of. If you are going to use these currency pairs then you should choose one currency pair to focus on.