When to Trade a Forex Cross Pair?

Exploring forex cross pairs beyond the USD offers forex traders a chance to diversify their strategies and tap into new market opportunities. Trading cross pairs can reduce reliance on the US Dollar, providing access to different economies and currencies.

This article will delve into when and how to trade forex cross pairs.

What is a forex cross pair?

A forex cross pair is a minor or exotic currency in the foreign exchange market that does not include the US Dollar (USD). Instead, it involves a direct exchange rate between two other currency pairs. Historically, most currencies were first converted into USD and then into the target currency. Cross pairs simplify this process by providing direct trading between two non-USD currencies. Some popular currency pairs are EUR/GBP, AUD/JPY, GBP/JPY, and more.

What are the optimal timeframes to trade a forex cross pair?

London session (8:00 AM - 4:00 PM GMT)

The London session is one of the most active periods for forex pairs trading, especially for cross currency pairs in forex involving European currencies like EUR/GBP or GBP/JPY. High trading volume during this session ensures tighter spreads and more predictable price movements.

New York session (1:00 PM - 9:00 PM GMT)

The New York session can be optimal for cross forex currency pairs involving the US and Canadian markets, like GBP/CAD (British Pound/Canadian Dollar). While it is less relevant for some cross pairs, high activity during this session still contributes to significant market moves, especially when overlapping with the London session.

High liquidity times

Cross pairs typically have higher liquidity during the active hours of their respective currency regions. For example, AUD/JPY will see more liquidity during the Asian and early London sessions, while EUR/CHF will be active during European market hours.

Overlap of major market sessions

The overlap between major sessions, such as the London and New York sessions (1:00 PM - 4:00 PM GMT), is one of the most liquid and volatile periods for trading. This overlap can also help cross pairs indirectly affected by USD-based movements or broader market trends.

Pair-specific activity

Certain cross pairs are more active during specific sessions. For example, EUR/JPY peaks during the overlap between the European and Asian sessions. Meanwhile, AUD/NZD can be traded during the Asian session when both regions are awake and active. Understanding pair-specific trading windows is crucial for timing trades effectively.

During economic news releases

Economic data or news events from the regions of the currencies involved in the cross currency pair can lead to heightened volatility. 

For example, EUR/GBP moves significantly during Eurozone or UK economic announcements. In contrast, AUD/JPY reacts strongly to the Australian Dollar or Japanese Yen’s movement and central bank statements. Traders often capitalize on the increased volatility around these releases but should be cautious of sudden price spikes.

Asian session (Tokyo)

The Tokyo session runs from 12 AM to 9 AM GMT and is particularly useful for trading cross currency pairs involving Asian currencies like JPY, AUD, and NZD. While the session tends to be quieter compared to London and New York, it can present opportunities in pairs like AUD/JPY or NZD/JPY, particularly during early hours.

Advantages and disadvantages of trading a forex cross pair

Advantages

• Diversification: Forex cross currency pairs offer traders a way to diversify their portfolios beyond USD-based pairs. This reduces reliance on the US Dollar and helps balance risks by providing exposure to various global economies.
• Reduced dependency on USD: Cross pairs move in a separate direction than US Dollar trends, which can be helpful during periods of Dollar volatility. Traders can focus on other currencies and their respective economies. 
• Broader market coverage: Trading cross currency pairs provides insights into the relationships between non-USD currencies, improving a trader's understanding of global economic interactions and improving market analysis.

Disadvantages

• Lower liquidity: Cross currency pairs typically experience lower trading volumes compared to major pairs, resulting in less efficient price movements and potential challenges in executing larger trades swiftly.
• Higher spreads: Reduced liquidity often leads to wider bid-ask spreads, increasing transaction costs and making these pairs less appealing for frequent traders.
• Limited news impact: Economic news directly affecting cross currency pairs is less frequent than USD-related updates, making it more challenging to anticipate and respond to short-term market movements with these pairs.

How to trade a forex cross pair

1. Choose a forex cross pair to trade: Traders should select a forex cross pair that aligns with their strategy and market focus. For instance, pairs like EUR/GBP or AUD/JPY may appeal to those interested in European or Asia-Pacific markets. The chosen pair should match the trader's expertise and analytical approach.
2. Analyze the cross pair's market dynamics: Evaluating the unique factors influencing the cross pair is essential. For example, EUR/GBP is driven by the economic relationship between the Eurozone and the UK, while AUD/JPY reflects commodity price movements and Japanese monetary policy. Technical and fundamental analyses specific to the pair are required.
3. Select a trading platform that supports cross pairs: A suitable broker or trading platform must offer access to a variety of cross currency pairs and competitive spreads. Platforms that provide analytical tools and resources tailored to cross-pair trading can enhance decision-making.
4. Set up entry and exit points for the cross pair: It is crucial to identify support and resistance levels specific to the cross currency pair. Traders can use tools like Fibonacci retracements, moving averages, or candlestick patterns to establish precise entry and exit points, considering the pair's typical volatility and price range.
5. Determine position size based on cross pair volatility: Cross currency pairs often exhibit unique volatility levels compared to major pairs. For example, GBP/NZD tends to be more volatile than EUR/JPY. Traders should adjust their position size to reflect the risk associated with the specific pair, avoiding overexposure.
6. Place the trade: Once analysis is complete, the trade can be executed with the correct lot size, stop-loss, and take-profit levels.

*This is an example only to enhance a consumer's understanding of the strategy being described above and is not to be taken as Blueberry providing personal advice.

Navigating forex cross pair trading

Trading forex cross currency pairs offers diversification and opportunities beyond USD-driven movements but requires careful planning. Traders should focus on the pair's unique dynamics, account for lower liquidity and higher spreads, and stay updated on regional economic factors. Adopting a risk management strategy is essential to navigate the complexities and maximize potential returns in this niche market.