💱 What are Cross Currency Pairs?
Cross currency pairs (also called "crosses") are currency pairs that don't include the US Dollar. Examples include EUR/GBP, EUR/JPY, GBP/JPY, and AUD/CAD. They're less liquid than major pairs but offer unique trading opportunities and diversification benefits.
Introduction to Cross Currency Pairs
Cross currency pairs are calculated from major pairs but traded directly. For example, EUR/GBP can be calculated from EUR/USD and GBP/USD, but it's also traded as its own pair.
Why Trade Cross Currency Pairs?
- Diversification: Different from USD pairs
- Unique Opportunities: Country-specific relationships
- Lower USD Dependency: Less affected by USD news
- Trading Opportunities: Good for swing trading
- Policy Divergence: ECB vs BoE, etc.
Common Cross Currency Pairs
1. EUR/GBP (Euro/British Pound)
Characteristics:
- Moderate volatility (40-70 pips daily)
- Sensitive to ECB and BoE policy
- Political sensitivity (Brexit-type events)
- Learn More
Best For: Swing trading
2. EUR/JPY (Euro/Japanese Yen)
Characteristics:
- Moderate to high volatility
- Carry trade pair
- ECB vs BoJ policy divergence
- Risk-on/risk-off sensitive
Best For: Swing trading and position trading
3. GBP/JPY (British Pound/Japanese Yen)
Characteristics:
- High volatility (most volatile cross)
- Carry trade pair
- BoE vs BoJ policy divergence
- Risk-on/risk-off sensitive
Best For: Experienced traders only
4. AUD/CAD (Australian Dollar/Canadian Dollar)
Characteristics:
- Commodity vs commodity
- Gold vs oil correlation
- Moderate volatility
- Risk currency pair
Best For: Swing trading
Cross Currency Trading Strategies
Strategy 1: Policy Divergence Trading
Best For: Trading based on central bank policy differences.
How to Trade:
- Identify policy divergence (e.g., ECB raising, BoE cutting)
- Enter in direction of stronger currency
- Hold for extended move
- Use proper risk management
Example:
- ECB raising rates + BoE cutting rates
- EUR/GBP rises
Strategy 2: Trend Following
Best For: Trend following strategies.
How to Trade:
- Identify trend using moving averages
- Enter on pullbacks using Fibonacci retracements
- Use trendlines for confirmation
- Target: Trend continuation
Strategy 3: Carry Trade
Best For: Carry trade strategies.
How to Trade:
- Identify interest rate differential
- Buy higher-yielding currency
- Sell lower-yielding currency
- Hold for extended periods
- Use proper risk management
Key Economic Factors
Policy Divergence
Important For:
- EUR/GBP: ECB vs BoE
- EUR/JPY: ECB vs BoJ
- GBP/JPY: BoE vs BoJ
How to Use:
- Monitor central bank policies
- Identify policy differences
- Trade in direction of stronger currency
Economic Data
Important For:
- GDP releases
- Inflation data
- Employment data
How to Use:
- Compare economic performance
- Trade based on relative strength
Best Timeframes for Cross Pairs
Day Trading
- Primary: M15, H1
- Hold Time: Hours
Swing Trading
- Primary: H4, D1
- Hold Time: Days to weeks
Position Trading
- Primary: D1, W1
- Hold Time: Weeks to months (carry trades)
Cross Currency Trading Checklist
Before trading cross pairs:
- [ ] Pair characteristics understood
- [ ] Policy divergence identified
- [ ] Trading session identified
- [ ] Trend or range identified
- [ ] Support/resistance levels marked
- [ ] Economic calendar checked (both countries)
- [ ] Stop loss set
- [ ] Take profit set
- [ ] Risk/reward ratio at least 1:2
- [ ] Position size calculated using risk management rules
Common Cross Trading Mistakes
- Ignoring Policy Divergence: Key factor for crosses
- Trading Like Major Pairs: Different characteristics
- No Stop Loss: High risk
- Wrong Timeframe: Using inappropriate charts
- Overtrading: Too many positions
When Cross Trading Works Best
Ideal Conditions
- Clear Policy Divergence: ECB vs BoE, etc.
- Strong Trends: Clear directional moves
- Normal Market Conditions: Avoid major events
- Major Crosses: EUR/GBP, EUR/JPY, GBP/JPY
Avoid When
- Unclear Policy: No clear divergence
- Ranging Markets: No clear direction
- Major News: High volatility
- Exotic Crosses: Lower liquidity
Summary
Cross currency pairs offer unique trading opportunities through policy divergence and country-specific relationships. Success requires understanding central bank policies, proper risk management, and trading during active sessions.
Key Takeaways:
- Cross pairs don't include USD
- Policy divergence is key factor
- Lower liquidity than major pairs
- Good for diversification
- Monitor both countries' economies
- Always use proper risk management