All posts in Cross Currencies

See on a live chart how cross currency correlations work in real time

The best way to understand the concepts that we covered in the first two parts of this course is to actually see what is going on in a live market environment in real time. This  does just that

In part one of this series on forex crosses and cross currency correlations we saw how currency pairs are constructed, the mechanics of what happens when trading an individual pair and finally the importance of understanding the difference between majors and crosses.

In part two we then looked at how pairs acted within triumvirates (pairs grouped in threes) and how this impacts upon your trading, particularly if you are scalping (short term trading). The segment goes over the main symbiotic groupings in the market and shows you when to and when not to trade a particular pair and the reasons for this.

Cross Currency Correlations In Real Time

In the video above we look at the price action from yesterday morning London session. We are concentrate on the three main pairs EUR/USD, EUR/JPY and USD/JPY

The video is particularly interesting as it show three different ways in which the three pairs interact as a triumvirate of pairs. Initially, we have a move up on USD/JPY and a corresponding move down on EUR/USD, yet if we watch EUR/JPY it is stuck in the same place and this is precisely because of the interrelationship between these three pairs. As time moves on EUR/USD stops falling and this releases EUR/JPY , allowing it to move up with  USD/JPY . Finally, EUR/USD starts to move up as well creating a perfect storm situation. This means that EUR/JPY shackels are now of and it moves up at an exponential rate compared to both EUR/USD and USD/JPY.

All of this can be clearly used to your advantage particularly with regard to the time of your trades and which particular pair to take. If you spend time analysing the support and resistance areas of each pair in a particular group then you can pre empt some of the moves particularly the “perfect storm” set ups.

One additional thing to bear in mind is the time of day as this has considerable bearing on moves. In the London session for instance the controlling pair is more likely to be  EUR/GBP. Whereas in the New York session USD/JPY becomes the dominant player. This of course is not a hard and fast rule and news plays a huge roll in deciding the dominant pair. It is always useful to try to identify this as the sessions go on and watch for changes.

How to trade cross currency correlations

Categories: Cross Currencies, Forex Training
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Once you understand how currency pairs are put together, the next step is to look at how to trade cross currency correlations. 

You view how forex pairs are put together here

Key is your awareness of how Forex crosses are traded by the main Banks and the interrelationship between specific pairs. Once understood how you should trade these pairs, and use the correlations to your own advantage, particularly in terms of short term trading / scalping, needs to be made.

In this video we look at the symbiotic relationship between groups of currency pairs and how this relationship affects the movement of the pairs in the open market and, by extension, you chance of making a successful trade.

The importance of cross currency correlations in scalping

Particularly if you are scalping the effect that one interlinked pair can have on another is considerable. Each pair is part of a triumvirate of pairs whose movement impacts on each other. If you are in a short term trade, entering the market for just a few minutes, looking for 7-15 pips, then the effect can be considerable.


How to trade cross currency correlations

For example, if you were to look to trade USD/JPY short and both EUR/USD and EUR/JPY were at resistance then there is a good chance that USD/JPY will remain flat making it difficult to make any profit. If on the other hand you wanted to trade EUR/JPY long and both EUR/USD and USD/JPY were moving up without any resistance then EUR/JPY would fly up, the reason being that EUR is being bought and JPY is being sold in the parental pairs movement.

The video shows a map of how the interrelationship between three different triumvirates can play out in the market. When you are initially getting to grips with how this relationship works it can be useful to have this in front of you (you can download the PDF below, we suggest you pint it out and keep it close to your trading monitor).

Assessing other cross currency correlations

Of course this is only three sets of triumvirate pairs, although probably the most important to know. There are obviously many more such as AUD/USD, EUR/USD and EUR/AUD.

One thing to bear in mind though is that obviously volume will play a role. On less heavily traded crosses one of parental pairs can tend to dominate and skew the effect.

At the end of the day nothing can beat experience. It is useful to group the triumvirates together on your platform (something that can be easily done with the TimeLanes) and just spend some time watching what is happening and seeing the relationships play out in a live market.

In the third part of this series on Forex cross pairs we will look at this relationship in real time as well as consider other factors such as time of day that can influence how these pairs react with each other.

Download here the map of the relationships between various currency pairs.

Forex Cross Currency Pairs

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What are forex cross currency pairs?

This might appear an odd question to ask a forex trader ….yet, in a recent survey we conducted amongst traders 69% of themyep…69% couldn’t tell us why a cross currency pair was different from a major pair! And many of these been trading for some years.

Digging a bit it became apparent that the basic issue was that a lot of traders don’t really understand the concept of pairs in the first place. The problem issue is that relatively few realise that when the take a trade there are  infact TWO transactions were taking place.

How Forex Pairs Work

The best way to look at is is to use an example. Let us say that you are going long on GBP/USD. …What is actually happening is that you are buying GBP and selling USD. It is actually very logical but few realise that this is happening.

The problem is,  not all currency pairs are the same.

Why is it important to understand this you may ask? After all you make a profit on if a pair goes up or down, the way it is constituted is surely irrelevant?  This is not true as the way the pairs are constituted has a big bearing on how they move.

The reason for this is is that not all pairs are the same, cross pairs are traded differently.

This all goes back to traditional currency conventions.

Currency Conventions

In order to understand why forex cross currency pairs are different, you first have to know the quoting conventions for currency pairs in the spot forex market.

Forex Cross Currency Pairs

Each currency pair consists of a ‘base’ currency (the currency on the left) and a ‘quote’ currency (on the right).

Traditionally, the base currency was always the larger of the two and despite the fact that relative currency values have changed,  the conventions have pretty much remained the same, except for the addition of the Euro in 2000.

The conventional order of currencies starts with the Euro (EUR). The EUR is always the base currency in any pair it is a part of ie it is always on the left hand side.

Next comes the British Pound (GBP). The GBP is always the base currency except for when paired with the EUR.

The full conventional order of priorities for the base currency (with respect to major and minor currencies) is:

  1. Euro (EUR)
  2. British pound (GBP)
  3. Australian dollar (AUD)
  4. New Zealand dollar (NZD)
  5. US dollar (USD)
  6. Canadian dollar (CAD)
  7. Swiss franc (CHF)
  8. Japanese yen (JPY)

The Major Pairs!!

From this list a series of pairs, known as “Majors” are created and  traded.


Any other pair is a cross pair (So the majority of traded pairs are forex cross currency pairs of one sort or another)

So why just these as Majors? Again here tradition again rears its head.

Somebody has to make the market and pretty much 80% of Forex volume ends with just few major banks, Deutsche Bank , UBS, Barclays Capital, and Citigroup being the principle ones.

Forex Cross Currency Pairs

Now these major banks only trade the majors. If you wanted to trade a cross pair the trade would be legged. This meant that two major pairs would be traded to create the cross.

How does that work?

For example let’s say you wanted to trade EUR/JPY cross. A Bank would Buy EUR/USD and Buy USD/JPY.

Now remember we talker of two transactions per trade, well with a cross there are effectively four.

So, in the example of the EUR/JPY

You are buying EUR, selling USD, (in the first part of the leg) then buying USD and selling JPY (In the second part of the leg). The two USD transactions cancel themselves out leaving you buying EUR and selling JPY, thus long on EUR/JPY

This animation in the video at the top of the page should make this clearer.

First you have your the two pairs, Euro Dollar  and Dollar Yen. To go long on them both you are buying Euro and selling dollar and buying dollar and selling yen. The dollar trades cancel each other out. leaving you with buying euro and selling yen. Thus you are long on EUR/JPY.

How does this impact on your trading:

Basically, if you were trading EUR/JPY  you should be spending as much time analysing EUR/USD and USD/JPY charts as you do looking at the EUR/JPY chart. It is particularly important when you are scalping.

In the next training, we will go through how to utilise this information to better trade the most important cross pairs.

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