Choosing a currency pair to trade binary options – majors or crosses?
Level
1/4

Before deciding to trade binary options based on a currency pair as financial instrument, a trader should know the difference between currency pairs.

Currencies – Majors and Crosses

aud money currencies smallThe most important one is the fact that the currency pairs are split into majors and crosses. Currencies in general represent the state of the economy and a currency pair is moving based on the economic differences between the two economies it represents. The following currency pairs are considered to be majors: EURUSD, GBPUSD, USDCAD, USDJPY, AUDUSD, NZDUSD, USDCHF.

Every other combination between the currencies above forms a so-called cross, and to give just a couple of examples, the EURGBP is a currency pair considered to be a cross because it is moving based on the differences between the Eurozone economies and the UK economy. Therefore, in order to properly take a decision when trading binary options based on a currency pair, one should consider the majors and the cross involved, as, depending on each and every situation, one may move faster/slower than the other one. Other examples of crosses are AUDCAD, AUDNZD, EURAUD, EURCAD, GBPCHF, AUDCHF, etc.

Majors are Tied to the USD

As a general rule, it is considered that when crosses are consolidating/ranging, the majors are moving, and the other way around, so if for whatever the reason, your analysis is showing consolidation areas for majors, then look for the cross to travel fastest, with the opposite being true as well. If you look at the currency pairs above you can see that majors have one thing in common: the US dollar. The reason for that comes from the fact that the US dollar is the word’s reserve currency and this is how the financial system works since Bretton Woods agreement.

Effect of the Economic Releases

Economic CalendarTrading binary options should take into account the type of the currency pair is analyzed. Currency pairs are forming the most common financial products that are being offered by binary options brokers so it is only normal to have such an analysis that should show the expectations as well as struggles a trader has when trades binary options with majors or crosses. It should be mentioned that majors are traveling fastest and more often than majors as the most important economic releases are coming out of the United States (hence the US dollar is moving) and from the other major economic powerhouses (Eurozone, UK, Australia, Canada, Japan, etc.) That being said, normally the beginning of a new trend is often seen when important releases or interest rate decision are being announced.

Caution with the Short-term Moves

For example, in the United States the most important economic release is the NFP (Non-Farm Payrolls) number as it is one of the things the Federal Reserve of the United States is looking at when establishing the interest rate. Therefore, on a strong NFP number the expectations are that the Federal Reserve is going to come and be hawkish or bullish next time they meet and this is going to support the US dollar. If there is a moment when the dollar to start a new trend it is when NFP is released and if the release is way below expectations it means easing may be in cards so the US dollar will be sold. As is the case with financial products that are traveling fast and furious, short-term expiration dates are recommended but I would be cautious on those too, as most of the times on news trading the first move tends to be the fake one and only after a while the real move is coming.

Crosses Have Potential for Consolidation – Look at the Bigger Picture

Nevertheless, the same is valid when trading crosses only this time a cross should be viewed as having the potential to consolidate some more and the idea here is to make the analysis on the bigger picture, like the 4h or even the daily chart and to pick the striking price from support and resistance areas on those time frames. After the striking price is being picked then the expiration date should definitely be bigger than in the case of majors.

One thing to keep in mind as well is the fact binary options brokers are offering mostly the majors and only a few crosses for trading and this may limit the possibilities one has. So, if interested to diversify your trading activity and portfolio by trading crosses keep in mind that chances are really big that the cross you’re analyzing is not offered by the binary options broker.

Another characteristic crosses have is that they are suitable for range trading so using an oscillator to look for divergences between price and the oscillator may bear fruits as ranges are the name of the game in this case. Asian sessions are the ones that are most suitable for this kind of binary trading but also after London goes home and late North American session is still open. The two video analysis that are coming with this project will focus in identifying the major and cross pairs and discussing the advantages as well as disadvantages when trading binary options on the currency markets.

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