Currency crosses can provide clues about the relative strength of each major currency pair. Example If EUR/GBP is trending downward, this indicates that the pound is relatively stronger than the euro at the moment. The better choice would be GBP/USD instead of EUR/USD due to the pound’s relative strength against the euro. Since the euro is weaker relative to the pound, if it proves to strengthen against the U.S. dollar, it is likely to strengthen LESS than the pound. If the U.S. dollar weakens across the board, GBP/USD would make more pips since it would rally higher than EUR/USD. So GBP/USD is the better trade. Know Which Currency Cross to Use: Let’s say you’re bearish on the U.S. dollar. How will you trade?
- Can’t decide whether to buy EUR/USD or sell USD/CHF? Look at EUR/CHF.
- Can’t decide whether to buy USD/CHF or USD/JPY? Look at CHF/JPY.
- Can’t decide whether to buy EUR/USD or sell USD/JPY? Look at EUR/JPY.
- Can’t decide whether to buy GBP/USD or sell USD/CHF? Look at GBP/CHF.
- Can’t decide whether to buy GBP/USD or sell USD/JPY? Look at GBP/JPY.
So always remember, looking at currency cross pairs could give you an idea of the RELATIVE strength of a particular currency. When trading obscure currency crosses, watch out for wild price swings and wider spreads.
Even if you wanna stick to the majors, you can make use of currency crosses to help you decide between which pairs to trade, as crosses can signal which currency is stronger. Don’t forget that moves in currency cross pairs can affect the majors. Please be conscientious of the pip value of the cross you are trading. Some crosses will have a higher or lower pip value than the majors.
This information is good to know for your risk analysis. So, on the days you may not see any opportunities in the major pairs, or if you want to avoid the volatility of a US news event, check out some of the currency crosses. You may never know what you may find!
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