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So, cross currency pairs? Aren’t they just the same as the minor pairs?
Trading forex is only possible with a currency pair. Yes, you trade currency pairs here, not a single currency.
The logic here is you get to maximize and profit from the exchange rate between the currency pairs.
Suppose you go long on EUR/JPY. In other words, you’re buying the EUR using JPY and speculating that EUR will strengthen against the JPY. Why?
Because the moment the EUR appreciates, the EUR/JPY will follow suit. When this happens, your long position will run at profit because the market moves upward.
There are two currencies to consider when choosing a currency pair:
Did you know that 180 currencies are legally traded in the forex market? Already overwhelmed?
Wait until you pair each with one another. There would be tens of thousands of pairs! That would make picking which currency pair to trade with much harder.
However, there are classifications you can use when you're choosing a currency pair to trade with. These are the major, minor, and exotic currency pairs.
For the major category, the pair must be between the US dollar and another major currency. The majors should be under the strongest global economy.
Contrary to the major pairs, the minor category doesn’t include the USD, but rather the crossing of other major currencies.
Lastly, exotic pairs are the pairing of a major and an exotic currency. By exotic currency, we’re talking about the currency of those countries that are becoming more involved in the global financial scene.
Over the years, the world has seen how the USD dominates almost every aspect of the global economy. With that, most forex traders trade pairs that have USD in it, driving its volatility and tons of profitable opportunities.
However, major pairs are not the only profitable among all the categories.
Instead of just looking at the seven majors, or the dollar-based pairs, you can shift your focus to currency crosses. In this category, you’re up to the same opportunities in majors. The catch? It’s safer because it’s not as volatile as the major pairs.
How come it’s as profitable as the major pairs if it’s not as volatile? Well, in cross currency trading, you open yourself to more possibilities because these currencies are not bound to the USD, thus it has a different price movement behavior, potentially more profitable than the major pairs movement.
Most, if not all, brokers platforms provide these rates for you automatically. However, it wouldn’t hurt to know how to calculate this yourself, right?
Okay, let’s assume you want to look at the rate of GBP/JPY.
When calculating the currency cross rate of this pair, you factor in the bid/ask price of both GBP/USD and USD/JPY. Yes, you should look at two pairs, essentially the ones where the USD is paired with both currencies in your pair (GBP and JPY).
Note: Bid is the buying price, while ask is the selling price.
Now, suppose the bid/ask prices of the two are;
GBP/USD: 1.3550 (bid) / 1.3552 (ask)
USD/JPY: 123.20 (bid) / 123.22 (ask)
After getting the bid/ask prices for the two pairs, simply follow these formulas for the rates of your cross pair:
Bid price= CP1 Bid x CP2 Bid
Ask price= AP1 Ask x AP2 Ask
Where:
CP1 Bid: Bid price of 1st currency pair
CP2 Bid: Bid price of 2nd currency pair
CP1 Ask: Ask price of 1st currency pair
CP2 Ask: Ask price of 2nd currency pair
Now, let’s calculate with these given:
CP1 Bid: 1.3550
CP1 Ask: 1.3552
CP2 Bid: 123.20
CP2 Ask: 123.22
We can conclude that the computation will be the following:
GBP/JPY Bid = 1.3550 x 123.20
GBP/JPY Bid = 166.936 / 166.94
GBP/JPY Ask = 1.3552 x 123.22
GBP/JPY Ask = 166.9877 / 166.98
Here, you can safely assume that the bid/ask price of GBP/JPY is 166.94 and 166.98