May 22, 2024

Business Bib

Business & Finance Blog

The Benefits of Trading Different Currencies

2 min read

When trading in the Forex market, there is a choice, together with your broker, to choose from dozens of different currency pairs. There are the most common and important ones, such as the US dollar, Euro and Yen, but there are plenty of other, less traded, but just as present currencies available. Traders have different opinions on trading multiple currency pairs. There are those that say do and those that say don’t. The main reason why some traders say to trade different currencies is to hedge their overall risk and hedging is considered a strategy when it comes to trading. Other traders suggest that hedging should not be used all the time.

Diversification

Diversification, or trading multiple currency pairs, allows traders to reduce risk. It makes it possible for traders to take advantage of correlated currency pairs which tend to trend in the same direction, as well as negative currency pairs that tend to move in opposite directions.

It is important to understand how forex currency pairs work in order to understand this. There are major currency pairs which are the major countries that are paired with the USD, such as EUR, GBP, AUD, NZD, JPY and others. Many of these currency pairs correlate in their price movement so that even though they may not be exactly the same, they move in the same general direction. In other words, if you trade on two of these at the same time, or trade a long position one one and a short position on another, you are essentially doubling your risk.

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Crosses

Crosses are currencies that are not paired with the USD and it can be beneficial to trade on a number of the major ones. If you select a few of these crosses, as well as major currency pairs and you master a forex trading strategy, you will be on your way to successful forex trading. Do not trade too many currencies at once or you risk losing focus; however you can add more as you become more experienced. Certainly, keep a watch on up to ten different currency pairs as you master your strategy.