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Binary Options

Tuesday, September 30, 2008

Trading the Cross Pairs

Trading Certainties

Have you ever wondered if there are trading certainties where you just cannot get it wrong. And I don’t mean a 50:1 long shot either.

If you consider the following fact “All Forex transactions flow through the US $ to promote liquidity”

So how does this help me find a dead cert in trading?

The simple answer is because there is a direct correlation between most cross pairs and their USD counterpart. It comes down to simple arithmetic. The two counterpart pairs are multiplied or divided by each other to get the cross pair pricing.

Examples of a few cross pairs are:
Euro/Jpy, Gbp/Jpy, Aud/Jpy, Gbp/Chf ,Eur/Gbp etc,etc

If we therefore look at the Eur/Jpy which is made up of the Eur/Usd and the Usd/Jpy and do the calculations. We now multiply those two pairs by each other.

Eur/Jpy = Eur/Usd x Usd/Jpy
or current Eur/Usd Price 1.4350 x Usd/Jpy Price 104.08 = Eur/Jpy 149.35 or within a pip or 2 of that price.

If your broker’s price is way off that then they are not calculating the correct interbank price for the cross.

This works with most yen crosses and many others.

AUD/JPY = AUD/USD x USD/JPY
GBP/JPY = GBP/USD x USD/JPY
GBP/CHF = GBP/USD x USD/CHF

Other pairs are divided by each other rather than multiplied.
EURGBP = EURUSD / GBPUSD
EURCHF = EURUSD / USDCHF

These methods do not account for all the crosses but then I can’t possibly trade them all and have not tried to find the calculation for all of them.

Logic therefore tells us that if both major currencies are going in the same direction then the cross will also go in that direction and this gives us a guaranteed profit.

A 10 pip move lower by both majors equates to about a 25 pip move down by the eur/jpy cross 1.4340 x103.98 = 149.10

Look at the following chart a 200 pip move down on the eur/usd and a 330 pip down move on usd/jpy produced a 600 pip run down on the eur/jpy cross over the next 20 hrs or so.

Click to enlarge


The vertical red lines show the start of the down run when both eu an ej crossed short. The MACD also crossed short on all three pairs to further reinforce the move.

Make a point of understanding how the calculations are done for the cross pair you want to trade and it will help produce many guaranteed profits.

If there are any Meta Trader EA programmers out there who can write an EA for this trade based on a reliable indicator (I normally use a MACD line with settings of 10,22,5) I would love to test it.

2 comments:

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