The Off-the-Radar Currency
Trades That 90% of Traders Miss
By Sean Hyman, Editor, Currency Cross Trader
My Favorite Way to “Fire” the U.S. Dollar
Why We Trade Currency Crosses
When you go to a restaurant, do you actually read the menu or order
the first thing you see?
Personally, I like to read the whole menu to see what the restaurant has
to offer. After all, if you just glance at the menu, you might miss the best
dish.
The Forex market is just like a restaurant. It has a long menu, full of
options. But unfortunately, most traders don’t bother to read the whole
menu. Instead, they just order what everyone else is ordering.
In this case, that means dollar-based currency pairs.
In fact, it’s estimated 90% of all Forex trading takes place across the four
dollar-based pairs (EUR/USD, GBP/USD, USD/JPY, and USD/CAD).
But those trades barely scratch the surface of what’s available.
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In reality, the Forex universe is much larger. Like the equity markets, where you can trade thousands of stocks on
exchanges around the world, the FX market offers over 60 different currency pairs for you to trade.
As a Currency Cross Trader subscriber, you know not all these tradable pairs include the dollar, either.
In fact, we find some of the best opportunities in non-dollar currency pairs, or “currency crosses.”
In the next few pages, I’ll explain why we trade currency crosses more than regular dollar pairs.
I’ll also tell you how these currency crosses enrich our trading strategies and improve our odds of success. So let’s get
started.
5 Reasons Why Currency Crosses Give Us More Bang for Our Trading Buck
#1) Clearer Trading Signals Increase Our Chances of Success
As a currency investor, you’ve probably noticed that the U.S. dollar drives a lot of the movements in the currency market.
That happens because the dollar serves as the reserve currency for the world’s central banks. So when speculators are
bullish on the dollar, capital will flow from most major currencies into the greenback.
But if the sentiment reverses, the opposite will happen — money will rush from the dollar.
You see, changes in interest rates, major political moves, and global events in all corners of the world can send
money rushing to (or away from) the dollar.
For that reason, there is a lot of “noise” that makes trading more difficult when you’re trading dollar pairs in the
Forex market.
Currency crosses, on the other hand, provide a clearer view of trends and price movement, because they’re not susceptible to fluctuations in the dollar.
By trading crosses, we place trades based on technical signals from the charts without worrying about surprising
news from the U.S. that might move the dollar.
#2) Greater Volatility in Currency Crosses Offers You More Trends to Profit From
As traders, volatility is our best friend.
The wilder a currency pair behaves, the greater the opportunities to trade and to maximize our profits. Some crosses
can be more volatile than dollar-pairs, which means greater opportunities to profit.
The graph below compares the volatility between different crosses for the last year.
CAD/JPY
1.27%
AUD/JPY
1.25%
EUR/JPY
1.24%
GBP/JPY
USD/JPY
USD/CAD
GBP/USD
1.15%
0.95%
0.94%
0.85%
It’s pretty clear that cross rates are more volatile. For instance, the Aussie dollar trades an average of 113 pips a day
versus the U.S. dollar (AUD/USD). The British pound/New Zealand dollar pair (GBP/NZD) trades around 230
pips a day on average.
That’s why currency cross traders love pairs such as the GBP/NZD, which trades about 80 pips more per day than a
“major” pair like EUR/USD.
And the crosses featured here are only a small sample of currency crosses. Other crosses, such as EUR/NZD (euro
against the New Zealand dollar), and the GBP/AUD (pound against the Aussie dollar), also have dramatic swings in
price on a daily basis.
The more radical movements in such currency crosses will give us more opportunities for extreme profits in shorter
timeframes. We can trade currency crosses for just a few days and earn the same profits it takes to earn with standard
dollar pairs in a week.
#3) Steady Decline in Trading Costs Results in More Profits in Your Pocket
As traders, it’s easy to overlook an important aspect of Forex trading: the cost of placing trades.
Remember that every time you place a trade your broker will charge you a spread as a transaction fee. The good news
is that spreads are narrowing for currency crosses at an increasing rate.
There was a day when you could only find reasonable spreads in major currency pairs. That’s no longer the case.
Many cross rates have spreads between their buy/sell quotes that are half of what they were just a few years ago.
As volumes increase in these crosses, spreads will narrow even more. What once was a roadblock is no longer a problem.
# 4) Crosses Allow You to Better Diversify Your Trades
If you have other investments, you know the importance of diversifying your portfolio. But most traders don’t realize
they can use the same principle to reduce risk in their Forex trades.
For example, if you believe the U.S. dollar will lose value, you might decide to open several trades against the dollar.
You might think that you’re opening several diversified positions, but in reality, you’re making one huge bet.
And that can be very dangerous. What do you think will happen if you’re wrong?
Let’s look at an example. Imagine you were ready to place a trade on May 4, 2011, right before the announcement of
U.S. employment numbers on May 5. At the time, the unemployment numbers was supposed to remain unchanged
— and economists expected the U.S. to add jobs.
From this positive outlook, you expect traders will take long positions in riskier currencies. You want to get in on
that action too, so you decide to open three trades against the dollar. You buy the Australian dollar, the Canadian
dollar and the euro, right before the good economic news is scheduled to hit the wires.
Pretty reasonable strategy, right?
One problem: during the day, oil prices plunged 8%, stocks sold-off on Wall Street and traders got antsy that perhaps that job data wouldn’t be quite as positive as expected.
Suddenly, the sentiment changed completely, and traders flocked into the dollar for safety. The graph on the next
page shows the results for major currencies in that single day:
Several Trades May End Up Being One Huge Risky Bet Against The Dollar
-0.60
British pound
-0.61
South Korean won
-0.61
South African rand
-0.70
New Zealand dollar
-0.72
Mexican peso
-0.78
Canadian dollar
-0.78
Singapore dollar
-1.02
-1.57
Swiss franc
Australian dollar
-1.94
Euro
-1.95
Danish krone
-2.18
-2.77
Swedish krona
Norwegian krone
So what was your profit for the day? Well, you lost 1.57% in the AUD, 0.78% in the CAD and 1.94% in the EUR.
Ouch! That’s a huge loss for only one trading day!
Indeed, playing different dollar crosses at the same time is not the best idea. It’s like being in a poker game where
you go all in, only to find out that the other player had the best hand. You’ll notice that in Currency Cross Trader,
when we trade an occassional dollar pair, we usually trade one at a time.
Otherwise, it comes down to one question: is the dollar going to rise or fall? And if you don’t have the right answer,
your trading account will be crushed in no time.
Trading crosses offers more of a diverse trading portfolio than just trading EUR/USD, GBP/USD, USD/CHF, and
other major pairs. If the dollar moves in a huge way, it’s going to affect all those pairs, even though other foreign currencies are involved.
But if you have EUR/USD and GBP/JPY, a “dollar event” will drive a move only in the first pair.
The second pair won’t be affected as much. And this is the way you can reduce your risks in FX through diversification.
Besides that, rather than placing only bets against — or for the — dollar, you can use particular information about
two different economies to generate more profits. And that brings me to my next point…
#5) Crosses Expose You to a Whole New World of Trading Strategies
By trading currency crosses you can easily expand your arsenal of trading ideas. You will no longer depend only on
the dollar movement to seal the fate of your trades.
The following are some of the more commonly traded crosses:
1. EUR/JPY (euro vs. Japanese yen)
2. EUR/CHF (euro vs. Swiss franc)
3. AUD/JPY (Aussie dollar vs. Japanese yen)
4. NZD/JPY (New Zealand dollar vs. Japanese yen)
5. GBP/JPY (British pound vs. Japanese yen)
But these are only the most common. As a Currency Cross Trader subscriber, you will discover the potential to trade
20-30 pairs. The diversity of pairs will allow us to develop several trading strategies depending on the currencies and
countries involved.
To better understand the power of currency cross trades, let’s take a look at a few examples.
Some currencies have well defined historical correlations with certain commodities. If they have a positive correlation, they tend to move in the same direction of the commodity. On the other hand, if the correlation is negative,
they tend to move in the opposite direction.
Trading currency crosses is a great way for us to use these contrasting correlations to boost our profits.
For example, if I think the price of oil is going to rise, I might recommend you buy a currency that will benefit, and
simultaneously sell the currency that will suffer from higher oil prices. This situation specifically applies to the Canadian dollar and the Japanese yen.
Canada is a major exporter of oil, so when the price of oil goes up, the Canadian dollar normally appreciates. Japan,
on the other hand, imports almost all of its oil. That’s why the Japanese yen depreciates as oil rises. Now, let’s say we
expect the price of oil to rise. Based on this expectation, we have three alternative trades to consider.
We can go short USD/CAD (buy Canadian dollar, sell U.S. dollar), go long USD/JPY (buy U.S. dollar, sell Japanese
yen), or we can buy the currency cross CAD/JPY (buy Canadian dollar, sell Japanese yen).
Let’s take a look at how a change in oil’s price has affected those crosses in the past. In this particular example, the
price of oil went up roughly 15% in less than a month. Here’s a comparison of the performance of those three alternatives during that time:
Using fluctuations in commodities is only one of many strategies we can use to profit from currency crosses. Often
we will find situations where you expect two currencies to behave differently against the dollar, with one appreciating
and the other depreciating.
Let’s take a look at another example that involves the British pound and the Japanese yen.
For most of August 2009, the British pound came under pressure because of its rising public debt. At the same time,
new government elections in Japan and other economic factors led to a stronger yen.
At that time, we would have had three alternatives to profit from these developments: buying yen against the dollar
(selling USD/JPY), selling the British pound against the dollar (selling GBP/USD), or buying the yen against the
British pound (selling GBP/JPY).
The graph below shows the results:
By simply determining which weak currency we would like to pair against a stronger one, we would have made considerable gains — as much as 20 to 50% more per trade. And all in a matter of days or weeks.
I want to give you an example of how we will be using crosses in the days and weeks to come.
Putting it All Together: A Currency Cross to Protect We When Stocks Fall
The Australian dollar is the most stock-sensitive currencies in the market. On the other hand, one of the most defensive, risk-adverse currencies out there is the Japanese yen.
So when you pair up one of the riskiest, market-sensitive currencies with one of the most defensive of currencies,
you have a pair that really tracks stocks quite well.
Therefore, the next time stocks are about to tank, one alternative we have is to short the AUD/JPY pair in the Forex
market. As stocks fall, the AUD/JPY will drop like a rock — and our trade will profit.
You can see an example of how well AUD/JPY tracks stocks on the chart on the next page. The top chart is AUD/
JPY and the bottom chart is the S&P 500.
Take a look at the red lines and you will see that stocks peaked and fell just as the AUD/JPY did the exact same
thing.
Simply shorting this pair can put us in the best position to profit. As you know, short selling is much easier in the
currency market. Unlike in stocks, there are no “uptick rules” or margin clerks to call to see if there are shares to borrow. With AUD/JPY, we simply click the “sell” market order button and watch the order fill much quicker than in
the stock market.
It’s just as easy to short in the currency market as it is to buy.
So if the S&P 500 rallies and then tanks, we can short AUD/JPY and help protect the rest of our stock portfolio as
stocks start to fall.
I’ll let you know when it’s the best time to dive into this pair. But if you’d like to trade this pair on your own, be sure
to set a stop-loss for this trade and only risk 5% of your overall account on this or any Forex trade.
AUD/JPY Rose & Peaked When Stocks Rose & Peaked!
Remember, we don’t want to settle for ordering the first thing on the Forex menu — especially when currency
crosses offer endless (and tremendous) opportunities to profit. As a Currency Cross Trader, you’re already set up to
make this happen.
World Currency Watch
98 SE 6th Avenue, Suite 2 Delray Beach, FL 33483 USA
USA Toll Free Tel: (888) 358-8125
Email: http://worldcurrencywatch.com/contact-us
Website: www.worldcurrencywatch.com
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