Top 5 Reasons Why Traders Prefer NON-DOLLAR Pairs (and Why You May Too!)
By Sean Hyman
Even though there are over 60 tradable currency pairs in the world, 80% of all daily transactions involve trading the G-7 currencies (i.e., the “major currencies”).
And as I’m sure you can guess, a significant chunk of those daily trades involves the U.S. dollar. It makes sense. Traders want to pair the dollar against other currencies because the world’s reserve currency promises to be the most liquid and readily available.
But what about the rest of the pairs…those that DO NOT involve the buck? In other words, why would anyone want to trade the “cross rates” or “crosses” (pairs that don’t include the U.S. dollar)?
Forex is more than just trading against the dollar…
There are several reasons. So let’s delve into them.
5 Important Reasons Why Traders Love Crosses
- The U.S. dollar may be the world’s reserve currency, but that also means that countless tiny factors play into the buck’s value. Interest rates, major political moves, not to mention global events in all corners of the world can send money rushing for (or away from) the buck. For that reason, many traders have a hard time getting a “feel” for where the U.S. dollar is heading. So rather than playing a guessing game, they simply avoid the buck altogether. Instead, they trade crosses, like the EUR/JPY or GBP/CHF, etc.
- Some crosses can be more volatile. That means they have the potential to jump higher or fall farther faster. Some traders like these types of quick movement because it gives you more opportunities for larger gains. This is why they have a love for pairs like GBP/JPY which trade about 100 pips more a day than a “major” pair like EUR/USD.
- Others like to technically trade crosses because they don’t have as much impact as often as dollar pairs do. You see, U.S. news is the biggest mover of currency pairs. So if you want to trade off of technical signals from the charts and not get as many surprises from news announcements, then you can trade the crosses.
- Spreads are narrowing for cross rates more all the time. (This is important because remember Forex dealers charge you the spread between each trade as their fee.) There was a day when the only reasonable spreads out there were in the majors. However, many cross rates have spreads between their buy/sell quotes that are half of what they were just a couple of years ago. As volumes increase in these crosses, the spreads narrow and draw even more traders into the pairs. So what once was a roadblock to some traders is no longer a problem.
- Trading crosses offers more of a diverse trading portfolio than just trading EUR/USD, GBP/USD, USD/CHF, etc. If the dollar moves in a huge way, it’s going to affect all of those pairs even though they have other foreign currencies involved. However, if you have EUR/USD and GBP/JPY and you get a “dollar event” that moves EUR/USD, it doesn’t necessarily directly affect GBP/JPY. Therefore, you’ve diversified your risks.
Which Cross-Rates Are Worth Trading First
These are some of the top reasons to consider trading currency crosses. Some of the most popular to start out with are…
1. EUR/JPY (euro vs. Japanese yen)
2. EUR/CHF (euro vs. Swiss franc)
3. AUD/JPY (Aussie dollar vs. Japanese yen)
4. NZD/JPY (New Zealand dollar vs. Japanese yen)
5. GBP/JPY (British pound vs. Japanese yen)
These are some of the more commonly traded crosses.
However, once you are open to trading cross rates, you are widening your scope of potential pairs. Once you open the door to cross-rates, you open yourself up to a potential of 20-30 pairs!
Also, remember that if a currency cross rate has a spread between its buy/sell quotes of eight pips but it trades 100-300 pips a day, then this type of volatile pair is just as worth trading as a major pair that has a two pip spread and trades 75-200 pips a day.
Bottom line: Many of the cross-rates offer significant opportunities, and you never know when a great trade set-up could be staring you in the face. So don’t let a slightly higher spread scare you off. Instead, think about trading set-ups that involve an additional 20 to 30 pairs.
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