› Playing ping-pong with the sterling cross-rates.

Playing ping-pong with the sterling cross-rates.

Trading on cross-rates is always related to higher risk due to several factors. The first one is the difficulty in fundamental analysis, as any cross-rate depends on three different economic conditions to monitor, instead of two as for the major currency pairs connected to the world reserve currency - the U.S. dollar. So, for example, if you want to trade on GBP/AUD pair, you need to watch GBP/USD and AUD/USD as the components of the cross-rate. That forces a trader to keep an eye on three regions at the same time - the UK, the U.S. and Australia, whereas the economic data weighs on the market sentiment. Secondly, the technical outlook becomes more complicated because of the sudden spikes and additional volatility amid the lower trading volume than usual.

However, the risk pays off with the profits. One of the largest advantages of trading cross rates is in the possibility to benefit in both directions, catching waves of the price fluctuations. A couple of trading tips are applicable for such a trading approach. Taking in count the high-risk manner of this technique, the money management restriction rules have to be followed in even more disciplined and tight manner, narrowing the volume limitations to the range of 0.5 - 1% of the account balance. So, traders should take care of a deep-enough deposit before starting such a practise described below.

This particular trading idea does not fit binary options traders’ popular aspiration to fast profits. Ultra-short timeframes like M1, M5 and M15 do not work effectively in the scope of technical analysis, having a huge number of fake signals. Traders without the patience to wait for H1 or H4 expiration should just switch to other trading strategies rather than wasting time for reading this article.

Every analysis starts with the fundamental side. As you could already guess from the headline, we’re looking for rangebound currencies which do not have a strong one-way trend. The British pound is exactly in such an environment currently due to the ongoing Brexit saga. The negotiations with EU started in 2017, and the British government doe not have a deal yet. Contraversive messages come from May’s cabinet, influencing spikes of the sterling up and down. Once an optimistic statement comes from officials, the bulls take the market under control. But when talks and rumours point to any uncertainty like a prolongation period, the cable drops like a rock versus all major currencies. That huge sideways range counts more than 500 pips in GBP/USD and those waves make the pound ideal for this trading technique.

british pound
Source: British pound

The second currency chosen here is the Australian dollar. On one hand, we’ve seen Aussie dropping to 2.5-year lows in September this year due to several factors: geopolitical tensions and trade wars, Chinese economy (the largest market for Australian export) slowdown and commodity prices decline. Australian central bank did not confirm hawkish expectations by traders and investors, forecasting the interest rates hikes in 2020. Internal economic troubles in Australia were also influencing the sharp drop in the currency. However, the market players realized that they’ve gone too far selling Aussie versus the greenback and other major currencies. RBA officials stepped in, making several verbal interventions, despite the fact that weaker local currency is in favour of exporters. The things aren’t so bad, as it was previously anticipated, and AUD/USD bounced off the bottom, consolidating in a similar sideways range currently.

An additional advantage of playing ping-pong with GBP/AUD is that this particular currency pair does not depend on the situation with the greenback. Of course, two components of the cross-rate are major currency pairs. GBP/USD and AUD/USD have to be monitored on a daily basis before making a trading decision on the cross-rate. Although, both assets have different active time in the scope of trading sessions and sometimes there is a lag in the price action between them. That lag allows us to take benefit from several waves of the intraday and weekly movements.

The technical part of the equation is quite simple. We use H4 timeframe, and we place two indicators in the price window and one in the bottom. Bollinger Bands indicator is one of the most popular tools to analyse sideways range, allowing to watch also the market volatility which is crucial for making the trading decisions. However, the traditional BB method has a lot of fake signals. This is why we use a modified option here with two indicators with different settings at the same time. The period of the indicator is enlarged to 34 from default 20. That allows us to increase the width of both upper and lower ranges, and thus, avoid false breakouts. The number 34 is also in a Fibonacci row and the mathematical influence in higher than usual round figures. The second parameter, the deviation, remains 2 for the first indicator and it should be decreased to 1 for the second one. This is how we get an additional zone of the price where we monitor the strength of the trend. When the price is between two upper ranges, that’s an active territory with the price action more probable in the same direction as before. The middle zone is more keep on the uncertainty of the market players.

We are seeking extreme market points and levels to enter the market. One of the best indicators for that purpose is the Stochastic Oscillator. It has overbought and oversold levels, which have to be set to 80 and 20 respectively. Those levels show when the price has gone too far and the reversal os more probable for the nearest future. Moreover, Stochastic has two curves, the same way as MACD, for example. The cross of those lines is an additional confirmation from the technical indicator. We also change the main period of the oscillator to 13 from 14.

One of the strongest signals for an uptrend to start after the consolidation period is the long shadow of the candle near the lower range of the Bollinger Bands. The confirmation from Stochastic comes with the lines crossing each other and we start buying CALL options here (the left blue arrow on the H4 chart below). We keep buying the CALL options despite the Stochastic is in overbought territory, as Bollinger Bands shows a series of bullish breakouts with the close prices staying well above the upper line. We stop buying CALL options once GBP/AUD fails to close above the curve and we wait for Stochastic Oscillator to come off the overbought zone before starting to buy PUT options. The cycle repeats until we see a long shadow on the downside of the candle near the lower BB range and Stochastic comes out of the oversold zone. We just keep repeating the cycle, reversing several times during the trading week.

Playing ping-pong with the sterling cross-rates.

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