The US dollar is used in more than 80% of FX transactions.
This is because the US dollar is the world’s reserve currency.
“Why the US dollar and not the pound or the euro?” you may wonder.
The majority of agricultural products and commodities, such as oil, are priced in US dollars.
If a country wants to acquire oil or other agricultural products, it must first convert its money into US dollars before proceeding.
This is why many countries keep a US dollar reserve on hand. They can make purchases considerably faster now that they have Greenbacks in their pockets.
Countries such as China, Japan, and Australia are significant importers of oil, and as a result, their central banks hold massive reserves of US dollars.
In fact, China’s reserve stockpile exceeds $3 trillion USD! Japan and Switzerland each have over a trillion dollars!
So, what does this have to do with currency cross trading? Because the majority of the world’s currency is the US dollar, the majority of trading speculation will be centered on one question:
“Is the US currency strong or weak today?”
This single question will have an impact on many of the most liquid currency pairs:
The majors:
- GBP/USD
- EUR/USD
- USD/CHF
- USD/JPY
The commodity pairs:
AUD/USD
- USD/CAD
- NZD/USD
All of these currency pairs are linked to the US dollar.
This doesn’t leave a trader with many options when the majority of their trading decisions are based on this single hypothesis.
You can see that trading any of the seven most popular currencies is essentially taking an anti-US dollar or pro-US dollar stance.
This single conjecture has an almost universal effect on these couples.
In contrast, traders in the stock market have various companies to choose from and are not limited to one single speculation idea.
When it comes to stocks, you can see that even if the overall market was up, there are still lots of other trading chances.
There is no single type of speculation that has an impact on the full basket of stocks.
Currency Crosses Provide More Trading Opportunities
Currency crosses enable more currency pairs for you to identify profitable possibilities than simply the seven “main” dollar-based combinations!
Trading currency crosses provides you with more trading chances because these currencies are not tied to the US dollar and may exhibit diverse price movement patterns.
While the majority of markets will only trade on anti-US dollar or pro-US dollar sentiments, currency crossings can provide new opportunities.
For example, all dollar-based pairs could be trading sideways or in an ugly pattern, in which case it would be prudent to SIT on the sidelines and WAIT for better trade setups.
However, if you knew how to change your charts to look at currency crosses, you might just find a plethora of trade opportunities!
Make a statement! The majority of traders only trade the big indices.
You can now join the small group of people who trade currency crosses.
Next Lesson: Trade Interest Rate Differentials