Currency Crosses: A Trend-Following Advantage

The forex market heavily revolves around the U.S. dollar, as the U.S. is home to the world’s largest economy. Consequently, U.S. economic news often causes dollar-based currency pairs to exhibit sharp, sudden price movements, or "spikes," even when the underlying trend remains intact.

These frequent spikes can make it challenging for traders to identify clean trends or range-bound conditions in dollar-based pairs.

Comparing Major Pairs to Cross Pairs

The Effect of U.S. Dollar SpikesConsider a major pair like EUR/USD. Due to the U.S. dollar's dominance, this pair often reacts to various U.S. reports, whether the data is significant or not. As a result, the chart might show erratic price movements, making trends harder to follow.

Smoother Trends in Cross PairsIn contrast, currency crosses like EUR/JPY or GBP/CHF are not directly tied to the U.S. dollar. These pairs are less influenced by U.S. economic activity, resulting in smoother, more predictable price trends. For example:

During a period when the euro is strengthening, EUR/USD might exhibit spikes due to U.S. data releases.Meanwhile, EUR/JPY might show a steadier upward trend, unaffected by the noise of U.S. dollar fluctuations.

This makes currency crosses particularly attractive to trend-following traders.

Example: Trading a Currency Cross Trend

Imagine trading EUR/JPY during a euro rally. While EUR/USD might experience choppy price action due to U.S. news, EUR/JPY could display a cleaner trend. A trader could confidently identify support and resistance levels, making it easier to enter and exit trades based on technical analysis.

For instance, a trader following EUR/JPY during a strong upward trend could bag a significant number of pips by riding the trend without worrying about disruptive spikes.

Why Trend Traders Prefer Cross Pairs

Cleaner Price ActionCross pairs tend to follow smoother trends because they are less impacted by frequent economic updates from the U.S.Reliable Technical LevelsSupport and resistance levels on cross pairs are often more dependable, allowing traders to confidently execute their strategies.Reduced NoiseThe absence of U.S. dollar involvement minimizes unnecessary volatility, making cross pairs a preferred choice for trend-followers.

A Bonus Benefit: Interest Rate Differentials

In addition to smoother trends, trading currency crosses offers another advantage—opportunities to capitalize on interest rate differentials between two currencies. This aspect will be explored in greater detail in the next section, adding an extra layer of profit potential to cross-pair trading.

By focusing on currency crosses, trend traders can simplify their strategies and take advantage of clearer price movements, making their trading journey more efficient and rewarding.

Currency Crosses: A Trend-Following Advantage

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