Cross currency in Forex trading terminology is a currency pair without the U.S. dollar. In foreign exchange market, trading is done in different currency pairs such as GBP/JPY (British pound-Japanese yen), USD/JPY (U.S. dollar-Japanese yen), USD/CHF (U.S. dollar-Swiss franc), etc. The pairing of these currencies differs 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. This is what happens in most cases in Forex trading. However, this is required when trading cross currency. A trader is therefore not mandated to frits exchange other currencies into U.S. dollar before he can be allowed to trade. There are several benefits of this as we shall see later.
Advantages Of Trading Cross Currency
1. It Eliminate The 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. This technique is designed to completely bypass this need which usually causes lots of inconvenience to 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. Wide Range Of 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. These four currencies will only be profitable when the U.S. dollar is considerably weak.
3. Elimination Of U.S. Dollars Effects
As said early, all world currencies are affected by the fluctuations or movements of the U.S. dollar prices. This effect extends even t the major world currencies including the British pound, euro, Swiss franc, and Japanese yen. Eliminating the need to convert these currencies into U.S. dollar before trading protects them from the effects caused by movement of the U.S. dollar prices. In fac6 all these major world currencies are heavily affected by the movement of the U.S. dollar. They become profitable only at the times 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. Trading cross currency allows the trader to make substantial profits regardless of whether the U.S. dollar is performing or not. 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
Fluctuations affect every world currency. It is this movement in prices that further leads to profits and loss while trading in the Forex market. Generally trading cross currency exposes you to lower currency fluctuations than experienced with currency pairs that include 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. Highly Insecure Markets
There are little drawbacks of trading cross currency. We can only talk about two drawbacks of this trading technique. First, there is potential that it does create highly insecure market. This is because of the high volume of trade characterized with lack of base currency for determination of price movements.
2. Political And Financial Uncertainties
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 puts trading such currencies at very high risk status.
Conclusion
Historically, Forex transactions were carried out only in US dollar. This necessitated the Forex traders to first convert the non-US currencies into US dollars before they can proceed with the trading. 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're interested in trading cross currency, I suggest you check out a broker with large selection of currency pair with low spread at HotForex review. Trading currencies isn't the only lucrative opportunities, read online gold trading to find out more about precious metal trading.
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