Forex trading is a popular pursuit worldwide but when it comes down to strategic decision making, there are several things to consider. Several types of currency pairs exist, including major, minor, and exotic varieties. It is essential that you understand the intricacies involved so you can not only maximize your chances of success but also avoid an unsightly turn of events.
Cross-currency pairs are an exceptional subset in the forex market and they offer an array of pros and cons. Here’s what you need to know about cross-currency pairs and how to navigate them.
Minor vs exotic pairs
Cross-currency pairs can be categorised into minor and exotic pairs.
Minor pairs incorporate the major currencies aside from the US dollar. Examples of minor currency pairs include:
- EUR/GBP
- GBP/JPY
- GBP/CAD
- NZD/JPY
Meanwhile, exotic pairs include one major currency and one from a smaller or emerging economy. Examples of exotic currency pairs include:
- USD/TRY
- USD/SGD
- EUR/HUF
- EUR/ZAR
Benefits
There are several advantages to trading cross-currency pairs. Firstly, they can help build a diverse portfolio, which is widely encouraged in trading and investing.It helps to protect investors from fluctuations of a single currency, otherwise, investors could be exposed to a more volatile or risky landscape.
Cross-currency pairs also provide the opportunity to profit from global economic trends. This could range from geopolitical ongoings to macroeconomic statistics regarding inflation. Having these up your sleeve allows you to expand your options and to trade forex strategically outside of major currency pairs.
Risks (liquidity)
As a trader or investor, being aware of liquidity risks is important. Exotic pairs especially can pose a big risk in this area because lower trading volumes can result in larger price gaps. This makes it tricky to execute trades at certain levels.
It’s always worth adjusting position sizes to reflect the situation, otherwise, you could face further risk. Having an awareness of economic events or turmoil is an important part of monitoring this, as liquidity issues can come off the back of stories reported worldwide.
Risks (leverage)
Leverage refers to the borrowed capital to invest in a currency, amongst other asset classes. It is widely used in forex trading and can help investors trade larger positions in a currency – although, this, in turn, can maximise the risk of losses as well as profits.
As a result, traders need to be cautious when applying leverage and especially in cross-currency pairs. Exotic currency pairs can be highly volatile and offer low liquidity, which means that the impacts of leverage can be magnified.
You can implement some risk management strategies, such as setting stop-loss orders. This is an order to sell a shareholding that is triggered if the bid price falls to the stop price, which is set by an individual trader.
