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How You Can Use Currency Crosses to Trade Spot Forex
If I told you that there was a large order in the market to buy EUR and sell GBP would you be looking to sell EURUSD and buy GBPUSD, do the opposite or step aside as the order gets executed?
We are just outsiders in the forex market
As outsiders, we are not privy to the flows in the market. Due to increased regulation, banks that are executing the orders are no longer able to pass on information. In addition, the increased use of online platforms makes it even more difficult to get information on order flows.
As a result, all we are left with is guesswork. However, the price action in major crosses, such as EURGBP, EURJPY, GBPJPY, etc., can give a clue to the order flows driving the price action in respective currency pairs. The focus of this article is on how to use this information to trade spot forex.
What is a currency cross?
Before I go on to the current trading world, let me define a currency cross.
A cross is the relationship between two currencies. It is simple algebra. There are two variables and one product that do not directly involve the dollar as that portion gets netted out. In all cases, the dollar portion is netted out and you are left with one currency vs. another with no US dollar component.
Example 1: EURGBP is calculated by EURUSD/GBPUSD = EURGBP. Let’s say EURUSD is trading at 1.0650 and GBPUSD at 1.2450. Then 1.0650/1.2450 = EURGBP .8554.
Example 2: EURJPY is calculated by EURUSD x USDJPY = EURJPY. Let’s say EURUSD is trading at 1.0650 and USDJPY at 154.60. Then 1.0650 x 154.60 = EURJPY164.65
The difference in the calculations where we divided the two currency pairs in example 1 and multiplied in example 2 is the way each currency pair is quoted vs. the US dollar.
For example, EUR and GBP are quoted as dollars per one EUR (or GBP) while USDJPY is quoted as Japanese Yen per US dollar.
However, this does not mean, as you will soon see, that the dollar is not impacted by cross trades as the market has to go into and out of the US xurrency (as the case may be) to create the cross.
No longer a dollar-centric world
When I first started trading in the forex market it was a dollar-centric world. The dollar was the center of all transactions and currencies rarely moved in opposite directions from one another. Most times currencies moved in the same direction in line with the prevailing dollar trend but not necessarily at the same pace. For example, if there was a EURGBP sell order and the dollar trend was up, both EURUSD and GBPUSD would both move down but the EURUSD might move farther and faster than the GBPUSD
Now, we no longer live in a US dollar-centric trading world but a multi-currency world. What I mean by that is while the dollar is still the dominant trading currency, cross-currency flows have become a large part of forex trading and more often than not drive the spot market. It is not unusual to see two currencies move in opposite directions direction against all currencies.
How to take advantage of crosses to trade spot forex
So, the question is how do you take advantage of cross flows, even if you do not trade the crosses directly? In other words, you do not have to trade the crosses to use them to your advantage in trading a spot currency, such as EURUSD or GBPUSD.
Let’s say there is a flow in EURGBP to buy EUR and sell GBP in a market where the overall dollar trend in both is up. By looking at EURGBP, you may assume there is buying of EURUSD and selling of GBPUSP to execute an order. In this example, the overall dollar trend is up but more so vs. the GBP than vs. the EUR. The EURUSD initially trades higher and GBPUSD tries to follow as the order gets executed. The EURUSD buying is easily absorbed as there are willing sellers as the trend is down ivs. the dollar. Once EURUSD hits resistance, the GBPUSD sell component of this flow takes over and GBPUSD falls sharply.
Why? The answer is that the market has less capacity to absorb the GBPUSD selling than the EURUSD buying to execute the buy order in EURGBP. Once the order is completed and/or EURGBP meets resistance, EURUSD will lose its cross-related bid.
If the EURUSD was in a strong uptrend and that was the dominant side, GBPUSD would have initially dipped but would not have gone that far. EURUSD demand out of this cross-flow would have then taken over and pushed it higher as that was the side where flows were less easily absorbed.
As we all know, trading rarely works like a textbook but in this simple example, you can see how crosses can give a clue to trading spot fx. They tell you what flows are going through the market in what can often look like a tug-of-war with respective currencies pulling in opposite directions. When the dollar trends are mixed, you can see currencies trade in opposite ways with the dollar only acting as an intermediary. As a general rule, one currency will have less capacity to absorb the flows and this is the side of the cross-trade that tends to be most vulnerable.
One way to confirm that there is real money driving a cross is when two currencies move in opposite directions vs. the dollar.
Real-time illustration
Here is a real-time illustration from April 19, 2024, where a move up in EURGBP has a greater impact on GBPUSD (sell) than EURUSD (buy)
EURGBPUSD MOVES HIGHER
EURUSD TESTS UPSIDE AND THEN STALLS
GBPUSD SELLING TAKES OVER
So, let’s conclude with the same question I asked initially:
If I told you that there was a large order in the market to buy EUR and sell GBP would you be looking to sell EURUSD and buy GBPUSD, do the opposite, or step aside as the order gets executed?
This just scratches the surface but should give you an idea of how to use crosses to trade spot forex.
Feel free to contact me with any questions or comments.
Do Fundamentals Matter? They do in the coming week.
Pure technical traders will tell you that fundamentals do not matter, it is all in the charts.
While most new traders rely on their charts, you need to be aware of news that affect fundamentals. You no not have to become an economist but you must be aware of what news is coming out (see our Economic Calendar),
Ask anyone who has tried to trade purely on charts and gotten whipped by a surprise economic or news event.
As I said, you do not have to become an economist but you need to be aware of what markets are focusing on. To keep it simple, the reason why markets react to news is the extent to which it affects expectations of changes in monetary policy.
In the current market, the focus, except for Japan (focus is on tightening monetary policy) , is on the number and pace of interest rate cuts.
We can discuss fundamentals in more details but the reason for this update is to make you aware that the upcoming week has more kep news events that I can ever remember.
My suggestion is to stay flat into these key events and then decide after whether to go with the flow or fade the reaction. This is how I trade news events.
So let’s take a look at the week ahead. The previews in this report may be too much to digest so be aware of the day/time/and the consensus forecasts.
See full detailed previews
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Newsquawk Week Ahead 29th July-2nd August: Highlights include FOMC, BoJ, BoE, NFP, ISM Mfg. PMI and OPEC+ JMMC
What is a Liquidating Market and How to Trade It
Not all markets should be treated the same. It is therefore tmportant to identify whether you are in a trend, correction, consolidation or what I call a liquidating market.
What is a liquidating market?
A liquidating market is one where the flows are looking to exit positions and not add to existing ones.
For example, take the current market where short JPY carry trade positions (we will discuss carry trades) are unwinding in forex, gold, stocks. One of the lead in fx is AUDJPY, which is down 11 days in a row. See this 15 minute chart from July 25, 2024 and not how at each pause, there is a minor uptick followed by a push to fresh lows.
So the question is once you recognize the market is in a liquidating mode, how do you trade it?
IDENTIFYING THE TYPE OF MARKET YOU ARE IN IS ONE OF MY KEY FOREX TRADING TIPS.
The way these types of markets tend to trade is that they move in spurts as orders get executed and positions liquidated. Once the order is done, you may see some backing and filling as selling (as in the above case) is done and bottom pickers come in. (and vice versa when short positions are liquidated).
This often gives a false sense of a bottom as the market backs away from the low until the next wave of sell orders. This squeezes those trying to pick a bottom as they get stopped out by fresh selling and a new low.
Much depends on whether key technical levels get triggered as this can accelerate the move and bring in fresh selling. Liquidating markets will eventually exhaust themselves and finally reach a bottom, either by a key technical level holding or by the selling just running out of steam.
How to trade a liquidating marker
The way to trade a liquidating market is either to sell (or buy as the case may be) on the backing and filling but that is often difficult as it is hard to find a nearby stop if the chart is like a one-way street.
Another way is to put a stop entry at the low or high to go with the next wave of sell (or buy =0 order liquidations.
The other way is to wait it out and only go against the move if you sense it has completely lost steam.
However, the tendency is to buy at each pause, hoping to catch the falling knife after a new low. The danger in this approach is that by the time a low is in place you may be too beaten up to catch the bottom.
The key point is to recognize the type of market you are in and that the hardest trade is often the right trade. The easy and in this case the wrong trade is to buy the easy to get filled at what looks like an attractive level trade.
Note I used a market that is liquidating long positions as an example. The same principle applies to when short positions get liquidated.
8-forex-trading-tips-for-a-lower-volatility-market
It seems it has been eons ago the forex market was characterized by higher volatility, with average daily ranges exceeding 1% of the spot price more the norm than the exception.
If you are currently trading the forex market, it is hard to not recognize the lower volatility and choppy trading that have frustrated not only trend traders but day traders as well. I look at volatility as a market characterized by tight daily ranges and limited follow through with choppy trading, limited trends and often false starts in both directions. It is a matter of adapting in this environment to take advantage of opportunities to trade.
8 Forex Trading Tips for a Lower Volatility Market
A taste of things to come
Look at this chart and you get a taste of what you will see here going forward.
This is a chart with my Amazing Trader program running on it. It is the definition of a liquidating marlket.
Note the top 2 blue lines, the first indication of a potential top and change in direction.
Often after a third line, you will see an acceleration, in this case to the downside and you can see what followed.
This is a 4 hour chart but the same patterns work on any time frame, 5. 15. 30 etc.
Now let me tie this together.
Do you remember what I said about the importance of the high and low of the day or time frame chart.
This is the only level where there are stops to run., If the market cannot break to a new high or low, it will lose interest on that side and probe the other side in search of stops.
This is what happened in gold after breaking to a new record high.
This is a simple and common sense way of looking at trading. You can use any charting application to apply it. I find The Amazing Trader is the clearest way to identify a pattern.
We will cover the finer details in a later discussion/
LIQUIDATING MARKET
As we are in the early stages of the club and before I start going into specific strategies, I want to re-emphasize that my main goal when I trade is to identify what side to trade and that includes what type oif market.
The following 30 minute chart is from July 18, 2024 and is typcial of a liquidting market. Trend has been strong up and after topping out yesterday, we saw a liqudating market today.
Notice how each pause and blip failed, forming another blue Amazing Trader line, which was then followed by a new low. At each poause GBPUSD looked like it was bid. So, you tell me what side of the market was most at risk. Trying to pick a bottom was a sucker bet.
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I suggest reading this article as it explains what I mean by a liquidating market.What is a Liquidating Market and How to Trade It?
‘Why News Matters Follow Up
As you can see by this chart the initial reaction to the news did not follow through and an AT Directional Indicator gave a strong signal to the upside, which remained at risk as long as EURUSD stayed above 1.0860 (low was 1.0872)
It is easy to post this with hindsight but the takeaway is if you were on the wrong side when US retail sales came out you would likely have been stopped out.
By keeping your powder dry, you could decide whether to go with the reaction or wait for a sign to go the other way.
‘Why News Matters
One of my personal trading rules is not to hold positions into data as it only takes a surprise to catch you the wrong way. I prefer to keep my powder dry and then determine whether to go with the reawction oir fade it.
Here is an illustration with a 5 minute EURUSD chart from July 16, 2024 where the market was setup for a weak US retail sales report and then got caught out when the data came in above the consensus
Let me sum up a common sense approach to trading with 2 statements of fact.
1. Identifying the side to trade is more than half the battle in putting on better odds trades
2. Forex market is always looking to run stops
In forex, I focus on specific chart levels
Why?
Because forex has a common price feed. This means everyone sees around the same prices on their charts. Therefore, one can predict a market reaction if a level holds or is broken since everyone is looking at the same levels on a chart.
FACT: In forex, there is a never ending quest to run stops
You want to position by identifying the side least likely to see stops run against your position. Identifying where stops may be lying is a skill you can develop, especially by using The Amazing Trader.
Where do you find stops?
1) Above/below the high/low of the day. Algos will probe the high/low of the day to see if there are stops or not and react accordingly.
2) Above/below the high/low of the current week, prior week, prior month.
3) If in a trend stops often rest above/below the recent high/low in the direction of a trend after there is a retracement off those levels.
4) Stops are often are placed at prior support or resistance after a currency retreats from a high if bounces off a low
5) Market will often probe for stops around the “50” level (e.g. 1.0850, 1.2850, eyc). We will discuss this at a future time.
Here is a a illustration oif stops being run above the high of the day after a retracement of a major uptrend ended.
It is different with CFDs.
Brokers can have different symbols (e.g. NAS100 and NDX100) for the same underlying instrument.
They can also have different price feeds for the same symbol.
So I focus on patterns for CFDs rather than specific levels as there is not a common price feeds.
This just scratches the surface surface but gives you an idea what can drive the forex market,
We will see how to take advantage of this knowledge as we continue this journey.
Opening Week Gaps
(Reply to a Q&A)
In addition to using The Amazing Trader to illustrate and discuss the market, I will also share insights you might not find elsewhere.
There is a long-time Global-View member who says that opening week gaps in the price of a currency are more often than not filled. He is specifically referring to a gap between the closing week price and the opening price of the next week.
Take a look at this EURUSD chart for the week of July 1, 2024 and note the opening gap on the upside, moved down to fill the gap and then moved sharply higher in the following days.
The Amazing Trader charting pattern (red lines) gave confirmation to a bullish risk after the gap was filled (for another discussion).
Why Does Technical Analysis Work?
Most traders use charts to trade but my guess is that few have stopped to ask why the technicals that they use work. Once you understand why, you will be able to anticipate which levels or tehnical indicators should produce a market response, as you will see in this short video and the write up below it.
Why does technical analysis work?
The answer may come as a surprise but it will help you to use technical analysis to predict future price action. This is a concept I want you to understand so you can use technical analysis and charts to your advantage.
Some pure chartists may want to take me out and burn me at the stake for heresy as I have a different view of why technical analysis works. Some see it as predictive, like Elliott waves. I see it the opposite. It is not predictive by itself but rather you can use it to predict price behavior and here is the reason why.
There is nothing magic about technical analysis. It works because those who trade and follow markets use it. If they didn’t use it, then it would not be considered useful for trading. Let’s say the 173 day moving average was considered to be more important than the 200 day moving average. There is nothing magic about this level other than it becomes significant because more people use it in their trading.
In other words, the more people who use the same technical indicator, the more significant it becomes, I personally prefer to focus on chart levels, as I explain below, as it becomes easier to predict the reaction when a level holds or is broken.
Models by themselves do not predict future price behavior. Anticipating how technical traders will react to changes in price can give a clue as to market direction and momentum. This is common sense.
So if I am the only one looking at a specific level, does it really matter?
I prefer to focus on specific chart levels as they are more likely to appear on most traders’ charts. As an example, I am keen on using trendlines but I have to keep in mind that my line may differ from others based on my data differing or how I draw it. The same is true for moving averages (depending on what closing rates are used) and retracements (depending on what range and time frame is used). This is why I focus mainly on chart levels as it is easier to predict the reaction knowing others are looking at the same points as well.
For example, let’s say the key support/breakout level on the downside in the EURUSD is 1.0660 seen across multiple time frames. You can then assume there will be a reaction by technical traders if this level holds or is decisively broken.
So why does technical analysis work?
It works because people use it. The more people who use it the more significant it can become. How can you predict price behavior? The first step is to identify key chart levels and then anticipate the reaction if they hold or are broken.
You can find ways to identify key levels on your own but I find the best way for me is by using The Amazing Trader charting algo, which is programmed to use my uncanny ability to identify key chart levels and deliver them to charts in real-time.
In my updates in the Trading Club, I plan to show how to use this knowledge to take advantage of predictable behavior by technical traders and use it to trade.
Day Trader’s Guide to Beating the Market
Let’s get started with a video I created to show you a way to look at the market and identify what I call the strong side to trade.
You will find that I take a common sense approach to trading and one that should make sense to you.
If you have any questions post them in the Q&A forum.
If you would like to take a trial for The Amazing Trader, Click Here.
To watch the video click on the image below.
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