Minimizing risk by using crosses: Thoughts on trading with the news

If you are trading on news events, you may want to consider using a cross. This can help you get around the uncertainty with American releases and unexpected reactions to them.

 

Fundamental traders always take economic indicators into consideration, checking interest rates and prospects and acting accordingly. When a good figure is released for a certain country, the currency will usually rise. When the indicator is weak, the currency will fall.

 

The dollar, however, is different.

 

Since the break out the financial crisis, the USD has acted differently. The currency has risen  on bad US figures as traders flock to the “safe haven” dollar in times of trouble and ditch it on positive US figures, as they have more of a “risk appetite”. In recent months, sometimes the dollar reacts “normally” to the indicators, sometimes not. This has made the dollar very difficult to predict.

 

However other currencies continue to react normally to their own domestic indicators. The EUR drops on a rise in unemployment and the AUD enjoys an unexpected rate hike.

 

Example

On March 30 last year, the final release of UK’s GDP was better than expected – a rise of 0.4%. The GBP reacted with increases across the board. A few hours later, however, American CB Consumer Confidence was due. This is a major market mover.

 

The result was better than predicted as the markets moved up and down strongly and eventually the dollar has won the event – GBP/USD went down sharply and lost a significant part of gains.

 

But the outcome of the American figure and the market’s reaction aren’t known after the British release. There are five and a half hours, and the trader wants to ride on the Pound.

 

In this case, the wiser option would be to trade the Pound against another currency. In this case, it could be the Euro that suffers from the Greek crisis, so a currency such as the AUD that did not get any important news the same day, or the Japanense yen.

 

But why pick the yen? Earlier the same day, Japanese industrial production dropped by 0.9%, significantly worse news than was expected. The yen was on the decrease while the Pound was increasing. GBP/JPY did not drop like GBP/USD, but instead continued to rise after the release of the American CB Consumer Confidence.

 

There are many similar examples. Traders should keep an open eye to crosses, so they can avoid the high risk events in the US and choose a safer currency to trade against.

 

Also read:Most Predictable Currency Pairs – Q1 2012

 

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About Yohay Elam

Yohay Elam is the founder of Forexcrunch.com. He has been into forex trading for more than 5 years and will be sharing his experiences with Fair Trading Technology’s customer base. Before founding Forex Crunch Yohay worked as a programmer in various hi-tech companies. He holds a B. Sc. in Computer Science from Ben Gurion University.
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