Trading Courses

#7: What is a cross currency

Lesson 7

What is a cross currency

The good news is this:

You don’t have to stick to USD pairs.

There are cross currency pairs to trade – currency pairs without USD inside.

They also consist of major currencies from developed economies

Here’s what I mean…

EUR/GBP is most traded out of all these.

It involves 2 economic partners: the Eurozone and the United Kingdom.

Thus you can expect EUR/GBP to be liquid with high trading volume.

Benefits of trading the Cross Currency pairs

By trading the Cross Currency pairs, you can:

  • Find trading opportunities not found in Major Currencies.
  • Better express your opinion of the markets.

Here’s what I mean…

For example, if you’re bullish on GBP and bearish on AUD – you can long GBP/AUD.

Or if you’re bearish on EUR and bullish on JPY – you can short EUR/JPY.

GBP/AUD and EUR/JPY not available on the list of Major Currency pairs.

So if you only stick to the Major Currencies, you’ll miss out on these trading opportunities.

Moving on…

How to use Cross Currency to identify strength and weakness of the markets

Let’s say GBP/USD is in a strong uptrend.

The rally could be either due to:

  • A weak US Dollar
  • A strong Pound

You can’t tell why GBP/USD rallied just by looking at only 1 currency pair.

So what you can do is to reference it to other Cross Currency pairs.

For example:

If the GBP/AUD is strong as well, then GBP/USD’s rally is due to a strong Pound.

But if the GBP/AUD is weak, then GBP/USD’s rally is due to a weak US dollar.

You can also check against any other Pound Cross Currency pairs.

If they’re in an uptrend – Pound is likely to be strong.

If they’re in a downtrend – Pound is likely to be weak.