What Financial Product to Trade?
Choosing the financial product to trade is one of the most difficult things to do, especially if one is having a clear money management strategy and has, for example, limitations in both the amount to be traded on the daily basis and the trades to take.
Therefore, a clear distinction should be made between majors and crosses. These are the two big currency pairs categories and in the first category, the majors, are the most popular ones: eurusd, gbpusd, usdchf, nzdusd, audusd, usdjpy and usdcad.
They represent basically the US dollar pairs and this is coming from the fact that the US dollar is the world’s reserve currency and everything should be cleared in dollars. For example, if a company in Canada wants to buy another one in, say Australia, it has to pay for it in Australian dollars. This means it needs to sell Canadian dollars and to buy Australian dollars to pay for the goods aquired. This is made through major pairs listed above.
On the other hand, all the other currency pairs the broker is offering are being called crosses, and they are the ones like eurgbp, eurjpy, gbpchf, etc.
It is important to know that as a cross is moving only based on the differences between the two economies it represents and crosses are traveling faster on break-outs, but spend most of the time in consolidation areas (ranges).
Using a Cross
Therefore, they should be treated differently than the majors and choosing the expiration date when trading a cross is vital for any trader.
The first thing one should do is to try to make a distinction between different assets offered for trading, basically what are the products the binary options broker is offering for trading. That being said, expectations should be set accordingly.
The most popular products in binary trading are related to the FX world, namely the currency pairs. The world’s reserve currency is the US dollar as clearings and fixes in London and New York are denominated in US dollar since the Bretton Woods agreement. It means that any currency pair that it is compared directly to the US dollar is being called a major pair. Any other, are considered crosses and they are moving based on the differences between the two majors it represents.
Crosses and Majors
To give you an example, the gbpchf cross is moving based on the differences between the usdchf, which is a major, and the gbpusd, which is another one. If the usdchf is moving to the upside 1% and gbpusd is moving in the same time to the downside 1%, it means the cross, the gbpchf pair is going to stay flat (this means it will have a very small range, like a couple of tens of pips). When this is happening, one touch or boundary binary trading is recommended.This is happening when major economic events out of the United States are being announced/released as the US dollar is travelling against every currency pair.
As a rule of thumb, it should be noted that crosses are travelling less than majors so one should be careful about that. It doesn’t mean that crosses are not forming impulsive moves, but only that these impulsive moves are not that common like in the case of major pairs and this is only because of the US dollar role in the world monetary system.
If the favorite way of trading binary options is by looking at lower time frames and setting short term expiration dates, then crosses are favored for one touch or boundary trading, as mentioned a bit earlier.
Range Trading with Crosses
Because a cross pair is by far subject to range trading, using divergences can be successful as overbought and oversold levels can be easily identified. The way to go in this case is to choose an oscillator against price is compared with and by the time a bullish divergence is forming call options should be traded while on a bearish divergence put options are the name of the game.
Another thing to consider when trading cross pairs and they finally trend, or forming an impulsive move, is to look for the corrective waves, namely the second and the 4th waves to take way much more time to consolidate when compared to corrective waves in impulsive moves traveled by major pairs. The reason for that is the fact that crosses range more, as simple as that. Therefore, complex corrections are supposed to be really complex, like double or triple threes or combinations, and simple corrections, while simple, expect to take much more time than a simple correction in a classical impulsive move with a major pair.