The new role of cross-currency triangulation for forex is due to the fact that there are lots of currencies that cross each other, i.e., currency pairs that have the United States Dollar as one of their constituents, and are not traded against each other.
Cross-currency pairs such as the EUR/JPY, GBP/CHF, GBP/JPY, and EUR/GBP have evolved over the years since Euro was introduced and the rearrangement of the currency market.
Moving forward, cross-currency triangulation is often regarded as the method in which amounts from one currency are converted to another currency through another currency.
It is essential to note that a currency cross pair is the production of two different currency pairs with U.S Dollars and non-U. S Dollars used as the basis of calculation.
One vital thing about cross-currency triangulation you need to know about is that after the inception of the Euro, a process of transacting businesses in Euros and allowing funds to come back to their national currencies had to be produced.
With that in mind, the 1997 cross-currency triangulation was implemented to conduct transactions in the Eurozone by converting currencies into three decimal places.
This implies that to convert a currency to another currency using cross-currency triangulation, it should be rounded to Euro and not more than to three decimal places.
One of the main reasons for triangulation is that it provides profits for traders due to the disparities in the exchange rates of different currencies.
Usually, the trading of currencies takes place between banks that quote the currency rates.
This profit-making opportunity occurs in interbank and retail-currency trade as a result of the inconsistencies in exchange rates.
Generally, it is also essential to know that the triangulation rule was invented before the inception of Euros, but it has to do with triangulating pairs such as the USD.
Furthermore, currency pairs also have to do with the bid or ask spreads to the advantage of forex traders.
Hence, skilled traders in the forex make use of bid or ask spreads discrepancies in currency crosses, but these profit opportunities may last for 10 seconds only.
Additionally, cross-currency triangulation also involves making use of the disparities in the exchange rates between currencies.
As a forex trader, the only trading opportunities exist between cross currency triangulations, which includes EUR, GBP, JPY, CHF.
Why Cross Currency Triangulation
Most forex brokers in the market now make use of cross currency pairs in their rates sections of their trading areas.
A trader can efficiently perform trades involving GBP/USD currency pairs as quickly as the USD/GBP.
With cross-currency triangulation, traders can easily make transactions of any arbitrage opportunities with 2 or 3 currency pairs crossed by different nationalities.
Additionally, traders can also capitalize on any other bid or ask spread possibilities through cross-currency triangulation.
There are lots of opportunities that exist through cross-currency triangulation.
It has been noticed that lots of forex traders make use of currency crosses in their dealings, since cross-currency triangulation is a strong money-making possibility in the forex market.