The Overlooked Trick to Trading Forex Crosses

This topic, by the title, may seem a simple one to ask. It is also a bit open-ended. Do I mean this in a time-based way, or do I mean it in another capacity?

Let's find out.

As you may be aware, I am a big advocate for identifying a strong currency and pairing it against a weaker one, in order to find trading opportunities.

I do this with a simple three-step process, but ultimately it comes down to the conditions of that market.

Now, if you are new to the markets or unfamiliar with how forex pairs are set up and how they give insights into strength and weakness, then stick around, you may learn something.

Forex pairs are made up of a base currency and a term/quote currency, for example, EUR/USD, the EUR is the base and the USD is the term/quote. If you have EUR/GBP the EUR is the base and the GBP is the term/quote.  

But did you know that the cross pairs are derivatives of the major forex pairs?

The major forex pairs include:

• EUR/USD

• GBP/USD

• AUD/USD

• NZD/USD

• USD/CAD

• USD/JPY

• USD/CHF

Cross pairs are made up of these majors pitted against each other. For example, EUR/GBP is made up of EUR/USD and GBPUSD. I don't think many new retail traders understand that the movements on the majors impact the cross pairs. They are often looked at as their own separate entities.

But knowing that they aren't can give you a huge advantage, especially when it comes to looking for trading opportunities.

Let me give you some examples.

Let's say you are looking through your charts and you notice that GBP/USD is approaching a major level of support that is derived from the weekly or daily chart. However, you notice that another major forex pair is not at any level. This would spark an interest in me to look for opportunities to buy the GBP against that currency.

On the 13th January this year, we had this scenario. GBP/USD was trading at the key support of 1.2100, a major level on the weekly and daily charts. On the other hand, the USD/CAD price was still trending higher. To me, this screams GBP/CAD long.

Why?

It shows us that GBP weakness against the USD could come to an end as it's at a key support point, but CAD is still weaker than the USD as it remained in an upward trend, shy of key resistance.  

Let's have a look at another strong example of this. This time we will look for one currency at resistance.

This time, let's take a look at EUR/CHF. On the 25th September, the EUR/USD price formed a rejection of the previous daily swing highs. At the same time, the USD/CHF price was at support but in a consolidation phase. This saw the EURO take the lead on weakness first, which then saw the EUR/CHF price continue to trade lower.

So, the moral of the story here is that the best time to trade a forex cross pair is when one currency is at a strong level of support or resistance and the other currency is still in a trend or consolidation phase.

Please remember, though, we should be adding more than this to our trading plan. With the EURO being at the highs, we had a strong CoT bearish signal as well, adding to some sentiment, plus the data out of Europe at the time was screaming a sell.

Try to combine as many confluences as possible to find a great trading idea and opportunity.

Have fun out there, traders!