Cross Pair

Cross pairs, in the context of Forex trading, refer to currency pairs that do not involve the U.S. Dollar (USD). These pairs are often referred to as 'exotics' due to their less liquid nature compared to major pairs like EUR/USD or GBP/USD. Cross pairs are typically traded against each other, rather than against the USD.

How It Works

Cross pairs are quoted in terms of one currency against another. For example, in the EUR/GBP pair, the base currency is the Euro (EUR), and the quote currency is the British Pound (GBP). The price of this pair represents how many units of the quote currency (GBP) are needed to purchase one unit of the base currency (EUR).

Trading cross pairs involves understanding the economic indicators and interest rates of the two countries involved. For instance, when trading EUR/GBP, traders need to analyze the economic data and monetary policies of the Eurozone and the United Kingdom.

Why It Matters for Traders

Trading cross pairs can offer several advantages to Forex traders:

• Diversification: Incorporating cross pairs into a trading strategy can help diversify a portfolio, reducing exposure to the USD and major currency pairs.
• Potential for Higher Volatility: Some cross pairs, due to their less liquid nature, can exhibit higher volatility, presenting more opportunities for traders.
• Leverage: Since cross pairs are typically less traded, they may offer higher leverage, allowing traders to control larger positions with less capital.

Example

Let's consider the EUR/GBP cross pair. If the current exchange rate is 0.8500, this means that one Euro can be exchanged for 0.8500 British Pounds. If a trader believes that the Euro will strengthen against the British Pound, they might buy EUR/GBP. If the exchange rate moves to 0.8600, the trader can sell the pair at a profit.

Key Takeaways

• Cross pairs do not involve the USD and are quoted in terms of one currency against another.
• Trading cross pairs requires understanding the economic indicators and interest rates of the two countries involved.
• Incorporating cross pairs into a trading strategy can offer diversification, potential for higher volatility, and higher leverage.