Even if you never wish to trade currency crosses and only trade the majors, crosses can help you make better forex trading selections.
Here’s an illustration…
Currency crosses can reveal information about each major currency pair’s relative strength. Assume you see a buy signal for EUR/USD and GBP/USD but can only enter one transaction.
Which one do you choose?
Simply staring into your crystal ball and guessing is unlikely to get the correct answer.
You would glance at the EUR/GBP cross to find the correct answer.
If the EUR/GBP rate is falling, it means that the pound is currently stronger than the euro.
Because of the pound’s relative strength against the euro, the correct solution is to buy GBP/USD rather than EUR/USD.
Because the euro is weaker in relation to the pound, if it strengthens versus the US dollar, it will likely strengthen LESS than the pound.
If the US dollar falls across the board, GBP/USD will gain more pips since it will surge higher than EUR/USD.
As a result, GBP/USD is the better trade.
You can do this relative strength analysis on any of the major currency pairs.
Know Which Currency Cross to Use
Let’s say you’re bearish on the U.S. dollar. How will you trade?
Can’t decide whether to buy EUR/USD or sell USD/CHF? Look at EUR/CHF.
Can’t decide whether to buy USD/CHF or USD/JPY? Look at CHF/JPY.
Can’t decide whether to buy EUR/USD or sell USD/JPY? Look at EUR/JPY.
Can’t decide whether to buy GBP/USD or sell USD/CHF? Look at GBP/CHF.
Can’t decide whether to buy GBP/USD or sell USD/JPY? Look at GBP/JPY.
So always remember, looking at currency cross pairs could give you an idea of the RELATIVE strength of a particular currency.
Next Lesson: What Time Frame Should I Trade?