The practice of cross-rates trading. From analysis to deal closing
A trader's successful trading consists of a huge number of factors. Even if we assume that a trader always feels comfortable in the market (psychological component) and has all the knowledge and skills of risk planning, it turns out that this is not enough to get profit on a regular basis.
Confidence and emotional stability should go hand in hand with a deep understanding of all market processes, and since the market is multifaceted and volatile, a successful trader always has a reference point, knows where he is and what to do in this or that situation.
Of course, just knowing all the market indicators or trading episodes alone will not make a trader successful, however, it is this factor that will determine the effectiveness of trading. Since trend exists in the market for a very short time, about 20-25% of the considered time interval, and the trader is not always able to recognize in time the emergence of directional movement, the effectiveness is reduced to 5-7%, and in the case of a prolonged sideways movement losses can exceed profits, from which even trading strategies of traders, professionals are not insured.
This article will allow the trader to get more market signals based on the analysis of conjugate currency pairs.
The pound and the yen, but without the dollar
Often the most mobile pairs on the market are cross-courses. Sometimes they are subject to chaotic movements, and sometimes they show a pronounced trend. Most often such pairs are difficult to analyze technically and pose a certain danger to a trader, while having a rather powerful potential.
[info_block align="right"]The most mobile pairs in the market are cross rates[/info_block]
Long-term forecasting of the movement of these pairs on the basis of fundamental analysis is more difficult because three currencies must be involved in the analysis at once. At the same time, trading is very energetic, which requires the trader to pay more attention to risk planning.
Let's look at the GBP/JPY pair. Both currencies, the pound and the yen, are quite mobile. Accordingly, the cross rate of GBP/JPY is even more volatile and therefore is of great interest to traders, as trading on this pair is often trending, especially in the medium term.
The proposed approach to the analysis of cross rates in the short term is as follows: Since the conversion is done with the U.S. dollar, we analyze pairs of GBP/USD и USD/JPY and on the basis of the identified trends we make a deal on the pair GBP/JPY.
How to start cross rate analysis
The British pound and Japanese yen quite often demonstrate opposite trends in trading against the U.S. dollar, and the difference between the economic climates of Europe and Asia makes trading on GBP/JPY more efficient than on other pairs, such as EUR/CHF. Besides detection of steady trends in the base pairs there is one more possibility for short term forecasting of cross rate movement. Let's consider the situation when In the midst of the European session trading on the pair USD/JPY are showing sideways movement and at that moment some statistics on Great Britain are coming out.
[info_block align="right"]We are faced with the task of determining the weight of a currency in a cross rate, by relating the distance traveled by the constituent currencies to the U.S. dollar[/info_block]
The British pound instantly reacts to this data, and we are witnessing a sharp directional movement. This movement is duplicated by the GBP/JPY pair, depending on the current USD/JPY pair dynamics.
Sometimes you can see the following picture: the British pound is falling sharply, the Japanese yen is trading in fluteand the pair GBP/JPY stands still, or trades with a slight decline. The resulting misalignment allows the trader to predict the further movement on this pair, since it is known that the more massive currency, in this case the pound, has ALREADY made some movement, which has not yet been reflected or not fully reflected in the price of the cross rate. However, given the current global trends, the state of the US economy, a decrease or increase in the pair, for example GBP/USD, leads to a corresponding decrease or increase in the price of the US dollar. Due to this fact, the above method becomes much more complicated, because now we are faced with the task of determining the weight of the currency in the cross rate, by the ratio of the distance traveled by the constituent currencies in relation to the U.S. dollar.
Trading example: analyzed, bought, closed
In support of the above evidence, let's look at an example that will clearly illustrate how this method works. We will analyze the cross rate GBP/JPY. Let's analyze the tick charts of the pairs USD/JPY, GBP/USD and GBP/JPY. We will consider the British pound as the key currency, as it has more weight than the yen.
At 17:25, as you can see on the chart, the downward movement ended and was replaced by an upward one. At that time, the Japanese Yen was in a short-term trend against the Japanese, which lasted for another 20 minutes, until 17:47. The GBP/JPY pair has also been in a sideways trend for about 20 minutes, starting at 17:06. At 17:25 the British pound begins a very sluggish rally against the yen, despite the emergence of a fairly strong bullish trend in the GBP/USD pair. At this point, you should buy.
After 17:47 the Japanese yen begins to strengthen against the US dollar, while the British pound is trading in a sideways trend. As a result the pair GBP/JPY falls, but after any sharp decline, in this case the pair USD/JPY, follows rollback. Taking into account that the British pound is still at high levels and trades with the rise, for profitable trading on GBP/JPY it is enough only to complete the trend on the Japanese yen. As a result, we get an excellent buy signal at 18:32 at 211.30, with a potential profit of about 40-50 pips.
Exit the market according to the same principle. At the occurrence of the weakness of the British pound, which we saw at 19:00, the pair GBP/JPY was still growing, giving us a great opportunity for a timely profit taking.