Cross currency in Forex trading terminology is a currency pair without the U.S. dollar. Trading in foreign exchange is undertaken in different currency pairs like USD/JPY (U.S. dollar-Japanese yen), GBP/JPY (British pound-Japanese yen), USD/CHF (U.S. dollar-Swiss franc), etc. The currency pairing does differ significantly. Some pairs may include U.S. dollar while other not.
In the Forex market, it is commonplace to first exchange other foreign currency to U.S. dollars prior to starting trading. In most case, this is what used to take place in the Forex trading. Fortunately, trading cross currency does not require this process. There is no mandate that a trader first exchange all his currencies into U.S. dollar before he can trade. This process created several benefits that as discussed below.
Benefits Of Trading Cross Currency
1. No Need To Convert Currency
The most ultimate benefit of trading cross currency is its elimination of the need to convert other currencies into U.S. dollar before being allowed to trade. The design of this technique is to completely bypass this conversion need which is the primary cause of many inconveniences to majority of Forex traders. Before, a trader was required to convert his currency into U.S. dollar and later converts back causing more inconvenience and loss of the currency value during the series of conversions.
2. Potential High Trades
By trading cross currency, the Forex trade has opportunity to make a wide range of trades. Of course these trades are in different currencies. This also eliminates the effects of the fluctuation of the U.S. dollars that traders were exposed to when making these series of currency conversions. The movement of the U.S. dollars has serious impact on the four major currencies i.e. British pound, euro, Swiss franc, and Japanese yen. For these four currencies, they will be profitable only if the U.S. dollar is weaker.
3. Removal Of The General Effects Of U.S. Dollars
Just as previously said, fluctuations of the U.S. dollar prices greatly affect the major world currencies. This effect is not limited to any currency and even the major world currencies like British pound, euro, Swiss franc, and Japanese yen are not exempted. These currencies are thus protected from fluctuation in the U.S. dollar prices by simply eliminating the need for conversions. In fact all these major world currencies are heavily affected by the movement of the U.S. dollar. These currencies only become profitable under conditions when the U.S. dollar is weak.
4. Profitable Trading Independent Of U.S. Dollars Performance
This technique generally allows for most profitable trading. The performance of your trading does not at any time depends on the movements of U.S. dollar. All the traders have the ultimate opportunity to be profitable by trading cross currency which is irrespective of the performance of U.S. dollar. In fact, this Forex trading technique serves as a better gauge to determine how other currencies have gained strength over the U.S. dollar.
5. Lower Price Fluctuations
Every world currency is affected by price fluctuations. It is this movement in prices that further leads to profits and loss while trading in the Forex market. Generally, you are exposed to lower price fluctuations when trading cross currency as compared to trading currency pairs that are constituted by U.S. dollar. This makes the cross currencies pair more stable thus suitable for new traders in the Forex market. This also prevents you from the overwhelming effects of price fluctuation caused by the U.S. dollar movements.
Disadvantages Of Trading Cross Currency
1. High Market Insecurity
Generally, trading cross currency has little drawbacks. There are only two demerits which we can talk about this trading technique. First is its ability to create a highly insecure market. This happens because the technique is characterized by high volumes of trades which often lack a base currency for determining the overall price movements.
2. Financial And Political Instabilities
There is growing concern over political and financial stability of most countries. The most affected are the underdeveloped and developing economies. Their political and financial scenario can change suddenly thereby causing serious impact on cross currency pairs. This subsequently makes trading such currency risky.
Conclusion
Historically, it was only in US dollar in which Forex transactions were undertaken. Due to this, Forex traders were required to first change their non-US currencies before they can make any trade. However with the introduction of trading cross currency, this is no longer the case; traders are allowed to trade these currency pairs without the series of conversions. This process has made the Forex trading very simple and easy. Even newbies in the Forex market can trade easily without much loss. The technique has also reduced the loss caused by fluctuation of U.S. dollar.
If you are interested in trading cross currency, I suggest you look into a brokerage with large variety of currency pair with low spread at HotForex review. Forex isn’t the only rewarding opportunities, read online gold trading to learn more about precious metal trading.
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