So if a big bank comes in and buys 1000 lots of eur/usd. Does that have a direct effect on aud/usd. Does the trade affect all pairs that involve the usd and eur? Or is every pair isolated? So if you short a currency in one pair, are you actually shorting it in all pairs?
Sort of.
A currency is a currency. So hypothetically, a massive sell off on the EURUSD can affect the AUDUSD. You do see this pretty often. The problem is that it’s not at all predictable because it depends on all the traffic that is going on with the other currency in the pair. You could have a massive sell off of the Dollar against a weak Euro and see price drop; but the Australian Dollar may be performing stronger than the USD and make gains.
I’ve seen advised in many places to not take out positions in pairs that share currencies because you’re essentially just doubling your risk without a better chance for reward. So if you opened a short position on the EURUSD and the AUDUSD; you’re speculating that the Dollar is going to gain against both currencies. Well; instead of doing that, why not just double the position on the set up that looks really good? It’s a very rare thing that the two will have identically strong set ups.
Every pair is not “isolated” but you are not shorting in every pair either. They’re all drawing on the same pool of economic data.
As an example; the way I implement it in my trading is thus-
I watch a few USD pairs, Euro pairs, and Yen pairs. If I have a trade open on a USD pair; I only look for opportunities in Euro or Yen pairs (that don’t include the USD) unless I’ve advanced my Stop to break even or profitable and see a beautiful continuation set up or rejection that indicates price continues to want to move in my direction.
When a move is made let say on the AUD, all cross currencie pair with AUD will be effected by the same strenght from the AUD. The strenght of the other currencie will determinate the volatility of the move.
Example:
The AUD is up because economic news.
And the USD is weaker than the JPY
The AUDUSD will have more volatility to the upside than the ADUJPY.
All JPY pairs are positively correlated. The EURUSD and the GBPUSD are positively correlated. Whereas, the EURUSD is negatively correlated to the USDCHF. The EURCAD, the EURAUD, and the EURNZD are positively correlated.