World Currency Watch: FOREX Market, FOREX Trading BLOG

Cross-Examining Cross Rates

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

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

What’s Considered a Big Move in Forex?

By Sean Hyman, Currency Analyst
www.worldcurrencywatch.com

Traders ask me this question all the time. And I can’t blame them. After all, if you can’t identify large moves in the Forex market, you can’t possibly know if you’re earning the kind of profits you want.

So let’s clear this up right now, shall we?

First to understand the answer, you need to know that the Forex market does NOT move in points or ticks like other markets. Instead, the Forex market moves in pips – the smallest movements that currency pairs can make.

When you look at a trading screen, most Forex pairs are priced four places beyond the decimal point (the Japanese yen is the only exception). So if a currency pair moves 0.0001, then it moves one pip.

Now to find out what constitutes a big pip move, you need to look at how many pips a particular currency pair trades in a day. For instance, the Aussie dollar trades about 174 pips a day versus the U.S. dollar (AUD/USD). But more volatile pairs like the British pound/Japanese yen pair (GBP/JPY) trades around 352 pips a day on average.

Major difference. You can clearly see it below...

Similar Moves, Yet VERY Different Volatility

Some analysts will tell you that a 200 pip move is a big move for any pair. I beg to differ. If you’re trading a volatile pair like the GBP/JPY, then a 200-pip move is pretty average – in fact, it’s less than it typically trades in a day.

However, if a relatively non-volatile pair like AUD/USD shoots up 200 pips in a day, then you’ve got a huge mover on your hands.

Cross-Rates Zip Around in Price Much Faster

Actually, the GBP/JPY pair isn’t even the most volatile pair in the bunch. Other cross-rates (non-dollar currency pairs) have humongous swings in price on a daily basis.

Some of the biggest movers and shakers include the EUR/NZD (euro/New Zealand dollar) and the GBP/AUD (pound/Aussie dollar). Both of these pairs have daily swings of 525-565 pips PER DAY on average. There are some pairs that may not make it that distance from low to high for the ENTIRE WEEK.

Those extremely volatile pairs can move 100 pips as easily as some pairs can move 20 pips. In the end, it’s all relative. The point is you need to know what’s an ordinary move for any pair you’re trading. Then you can gauge how your pair is performing on a daily basis.

For instance, if a pair normally moves 200 pips but today it moved 400 pips (and that does happen…) then you might want to close your trade altogether and take your profits.

Or you might decide to close out part of your trade, take partial profits, and move your stop-loss up so you’re prepared just in case the currency pair swings violently in the other direction.

Therefore, know the typical trading ranges for any currency pair you’re buying or selling.

Note: It’s good to check the volatility on each pair at least once a month because volatility levels can change drastically. As the volatility changes, your stops, number of lots and your EXPECTATIONS will all need to change accordingly.

Regards,
Sean Hyman

Currency Options – Traded on Highly Regulated Exchanges with Your Normal Stock Broker

By Sean Hyman

So what are Forex options (aka currency options)? Forex options are options based off of a currency pair in the spot Forex market.

The advantage of an option contract is that you put down little money and control a sizable position. This means you have the opportunity to make large double or triple-digit gains in a very short period of time – just like in the Forex spot market.

The other advantage is currency options trade just like regular stock options on the Nasdaq OMX exchange. So if you’re already familiar with stock options, currency options are generally easier to trade because the “trading lingo” is the same.

Also, unlike Forex trades, you only ever risk your initial investment. For instance, if you paid let’s say US$500 for a specific option contract, you only risk that initial US$500, no matter what the markets do. In other words, your risk is strictly limited.

The downside of an option contract is that every option contract eventually expires, whereas trades in the spot Forex trade NEVER expire. In spot Forex, you just still have to have the margin left to continue to support the position. This is why I personally prefer Forex.

But with that said, let me discuss why some traders still choose to go this route.

To me, the advantage lies in what brokers you can use and where the instrument trades. You can trade currency options through the exact same stock brokerage account that you already have – as long as they trade options.

All you need to do (if you haven’t already) is ask your broker to give you the form to fill out to make the account “optionable.” That means that they give you the proper disclosure about risks, etc. Then you simply fill out the form, and your normal broker can prepare your account to trade options.

Then, you can buy a call or a put on six major currencies: the euro, British pound, Japanese yen, Swiss franc, Canadian dollar and the Australian dollar.

All these options are traded against the dollar by default. So buying a euro call option is like buying the euro/dollar pair (EUR/USD) in the spot Forex market.

Calls vs. Puts: Which to Buy?

You buy call options when you expect the underlying currency to rise. You buy what’s known as a “put option,” when you believe the currency will drop in value (versus the dollar).

These options are traded on the Nasdaq OMX (formerly known as the Philadelphia Stock Exchange) right here in the United States.

So you can trade these through a reputable, regulated stock exchange that you already hold your stocks, ETFs and mutual funds in. So that’s a nice advantage to them.

Currency options are typically the shorter to medium-term instruments used out there in “currency land.” So you use these options to trade short-term trends – lasting from several weeks to several months.

My Easy Guide to Understanding Currency Pairs

By Sean Hyman

All currency pairs are listed exactly the same way. For example, if you want to trade the U.S. dollar vs. the euro, you always use the EUR/USD symbol, whether you’re betting on the dollar or the euro.

There are a couple of important factors that helped to determine the order for each currency pair.

Let’s start with the pound.

It’s no secret that London is the FX center of the currency universe. After all, the British pound is still nicknamed the “cable” because currency trading between New York and London was once done via transatlantic undersea cable. In other words, currency trading goes WAY back in London.

Today, the London market facilitates more currency trades than anyone. So it only made sense to put them at the top of the list. That’s why the British pound is listed first in the GBP/USD pair.

Also, the strong British pound spent years with a significantly higher value than most the majors. Its higher value helped confirm its placement as the currency listed first in pairs.

The Pound Dethroned by the Euro! The Queen Couldn’t Have Been Happy

Simple enough right? Well, then the euro came along.

The euro officially started trading on January 4, 1999. But today, if you want to trade the British pound against the euro, you have to trade the EUR/GBP pair. So why is it listed as EUR/GBP rather than GBP/EUR?

Actually, at first, both Reuters and EBS (the two main quoting services) quoted the euro/pound pair both ways when the euro first started trading. At the time, the London traders hated that there was even a question whether the pound should be first.

However, Reuters and EBS decided that they would allow the market to decide which would last. It wasn’t long before the market determined that EUR/GBP was the clear winner. So at that time, the “GBP/EUR” ceased to exist. It’s been the EUR/GBP pair ever since.

How to Easily Tell Which Currency Is Which

It was this event that bumped the euro ahead of the pound as “king of the currencies.” So this became the order of hierarchy from that point on:

Euro (EUR)
British pound (GBP)
Australian dollar (AUD)
New Zealand dollar (NZD)
United States dollar (USD)
Canadian dollar (CAD)
Swiss franc (CHF)
Japanese yen (JPY)

Once this order was established, you could easily tell which currency is which. The higher currency on this list is always listed first. If you’re trading a currency that’s lower on the list, it’s always listed second. For example, the Aussie dollar is higher on the list than the U.S. dollar. So if you’re pairing them together, the symbol is AUD/USD, according to the list. Mystery solved! 

No Commissions, No Currency Restrictions – Forex Traders Come Aboard!

By Sean Hyman

The spot Forex market does have a few advantages over options trading.

For starters, this market trades 24 hours a day from Sunday evening until Friday evening. So you can enter and exit a trade at pretty much anytime day or night. That’s definitely useful for both grabbing profits and cutting losses, because I don’t have to wait for the market to open in the morning. 
So the hours offer more flexibility. Also these contracts (which are called “lots” in the spot market) don’t expire. So as long as you have the margin to support the lots, you can keep trading for as long as you like.

You have almost unlimited currency trading flexibility. In fact, you can trade 20 to 30 currency pairs through most any spot FX broker. And you don’t have to trade these currencies against the dollar. You can trade what’s known as “crosses.”

A cross is any pair that is traded that doesn’t involve the dollar. Here are some common crosses that are traded for instance: EUR/JPY (Euro vs. the Japanese yen), GBP/CHF (British pound vs. the Swiss franc), EUR/GBP (Euro vs. the pound), AUD/JPY (Aussie dollar vs. the Japanese yen), etc.

You also don’t have to pay commissions on your Forex trades, like you do with option trades. However, your broker (or “market maker”) will still charge you the spread to place both your Forex trades and option trades. The spread is the difference between the buy and sell quotes, and brokers use it to allocate fees to clients.

Also, the spot Forex market has enormous volume going through these currency pairs. This not only makes the spreads small (i.e. you spend less on each trade), but it also makes the fills better than you will see in any other market, including options.

However, naturally there are a few disadvantages to trading Forex. For starters, you have to open a special Forex trading account to trade the spot Forex market, with a specific Forex dealer.
Honestly, that’s not difficult to set up, but it’s something to keep in mind. Also, like I said, Forex trading has its own language. So make sure you review your broker’s trading manuals before you dive right in.

And last but not least, you have to manage your risk in your account. This means don’t trade more than you can afford to lose, and keep tight stops because this market moves fast.
Speaking of moving fast, one thing that both of these methods have in common is that they are both leveraged instruments.

Leverage is often called a double-edged sword. It’s a benefit because it lets you shoot for big gains, but that means you take a bit more speculative risk with your investment assets. For example, when trading options, it’s possible to lose the premium you originally paid for your options contract.

When you’re trading spot Forex, you can lose anything above your stop that you place on the trade. However, you would determine that level depending upon your risk tolerance.

The Euro gets ready to diverge away from the New Zealand and the Aussie dollars!

Lately the euro has been tracking the New Zealand and Aussie dollars. You can see this from the charts below. The EUR/NZD on the left and the EUR/AUD on the right have been range bound as none of these currencies seem to get a leg up on one another.

However, that's about to change. These currency pairs are coiling up into a symmetrical triangle pattern. In fact, the EUR/NZD has already broken to the downside. The EUR/AUD may head the same way but that remains to be seen yet.

As these pairs break out, there will be significant moves which means there's a significant room for a huge profit to be made.

This will also show you which currencies end up being the strongest when trading the "majors" related to these pairs (EUR/USD, AUD/USD and NZD/USD). The one that ends up being the strongest is the one that you'd want to be long against the dollar.

However, in the mean time, these crosses are going to produce some huge profits as traders hop on board. These pairs will move hundreds of pips in a relatively short amount of time. That could be in a matter of hours to a maximum of two or three days I'd think.

Someone is about to win this tug of war. Shortly you'll find out. It may be the "commodity crosses" that team up on the euro.

So get ready and watch for the break on EUR/AUD and get poised into the EUR/NZD which has already broken to the downside. EUR/NZD could target 1.8800. That would be huge...but that's where the triangle's targets are pointing to.

Sean Hyman
Editor/Trader
www.money-trader.com