The Merits And Drawbacks Of Trading Cross Currency

In Forex terminology, cross currency is a currency pair that does not include 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 pairing of these currencies differs significantly. Some pairs may include U.S. dollar while other not.

Previously in the Forex market, it was commonplace to first exchange all other foreign currencies to U.S. dollars before 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. There are several benefits of this as we shall see later.

Advantages Of Trading Cross Currency

1. It Eliminate The Need To Convert Currency

Trading cross currency has the ultimate benefit of effectively eliminating the need to first convert other currencies into U.S. dollar before a trader can 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. Previously, it was a must for a trader to first make his conversion into U.S. dollar and also later converts back to his original currency resulting in severe inconvenience and also substantial loss of currency value.

2. Wide Range Of Trades

The Forex trader enjoys great opportunity to make several wide range trades simply by trading cross currency. 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. There is serious impact of the movement of the U.S. dollar on major currencies such as euro, Swiss franc, British pound, and Japanese yen. These four currencies will only be profitable when the U.S. dollar is considerably weak.

3. Removal Of The General Effects Of U.S. Dollars

As said early, all world currencies are affected by the fluctuations or movements of the U.S. dollar prices. 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. 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 fact, the U.S. dollar has significant effect on all the major world currencies. These currencies only become profitable under conditions when the U.S. dollar is weak.

4. Profitable Trading Independent Of U.S. Dollars Performance

There is profitable trading resulting from this technique. 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. This trading technique is now used as a better gauge for determining the gain in strength of other currencies over 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 trading cross currency exposes you to lower currency fluctuations than experienced with currency pairs that include U.S. dollar. This has a general effect of making cross currencies more stable thus beneficial to all new Forex traders. 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 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. 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 subsequently makes trading such currency risky.

Conclusion

Historically, it was only in US dollar in which Forex transactions were undertaken. 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. Newbies in the Forex market benefits from this by trading without making huge losses. The technique has also reduced the loss caused by fluctuation of U.S. dollar.



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