Lately, the cross-currency pair is more tempting. Major currency pairs are still a favorite of world traders. According to Investopedia, cross-currency pairs can be excellent tools for forex traders. Besides, cross pairs are increasingly attracting attention because they allow us to trade with fundamental differences that are easier to read during a crisis. For example, AUD / JPY or GBP / JPY which compares the classic safe-haven currency vs. the high-risk currency.
Let’s look at a few things that traders should know before deciding to trade a cross-currency pair:
Cross-Currency Pair Background
Euros (EUR), Yen (JPY), Pounds (GBP), Australian Dollars (AUD), Canadian Dollars (CAD), Swiss Francs (CHF), and New Zealand Dollars are among the groups of currencies known as “major currency pairs” when each traded with the US Dollar (USD).
They are also known as “cross-currency pairs” when traded between one another.
The reason why the USD is “major” is that it is the world’s reserve currency. USD is used in the majority of international trade and exchange.
That is why all currency trading versus the USD is more crowded than other currencies.
Besides, there are times when trading between non-USD currencies becomes much more crowded.
Settlement refers to the technical execution of opening and closing a trading position.
For example, John will trade EUR / USD with an account balance in USD currency, so the calculation of open and close positions is simple. However, the settlement matters will become more complicated if he chooses to trade EUR / GBP.
After profiting from the EUR / GBP transaction, John’s profit can be in the form of Euros or Pounds, which will then be converted to USD (according to the account base currency) automatically on the trading platform after closing a position.
Spread on Cross-Currency Pair
One of the main factors affecting spread is the liquidity of a currency pair. This is why major currency pairs always have super thin spreads. Spreads for the pair EUR / USD, GBP / USD, and USD / JPY can even be well below 1 pip.
However, cross pair liquidity is not that low. Spreads on cross-currency pairs have two distinctive characteristics compared to major pairs, which are larger and more volatile spreads (easy to widen and narrow).
You must always take this risk into account. Do not rush to accuse the broker of engineering when spreads spike suddenly.
After knowing all this, are you still interested in cross-currency pair trading?
It is undeniable that cross pairs offer big advantages. However, the law of ‘high profit, high risk’ will still apply. Thus, you should understand the ins and outs of currencies that you will trade to anticipate various risks that may occur. You should always test your trading system in a demo account before applying it to a real account. Good luck, traders!