This article is focused on trading EUR USD currency pair. What you are about to read is a EUR USD Trading Guide which could be extremely helpful for a lot of people who are about to begin or aspiring to start trading forex and be able to trade like a pro.
But before we come to the trading aspect – let’s talk about the trader angle of trading. Beginners and experienced traders alike – all are ever in a hurry to come straight to the forex trading, whereas we should first discuss ourselves, our temperament, our strengths and weaknesses as a trader, what type of trading will suit us best. What training and tutorials will help us get a better foothold and so on…
First Lesson for forex traders – Know Yourself
We happen to meet many traders in the course of my profession on different platforms – some enroll with us to learn forex trading or have a trading account, some we meet on forums and social networking platforms trying to make it big or are trading successful.
We often noticed during our interaction, specially with the new traders, that people were looking for simple solutions and explanation in an easy to understand language to get a hang of trading in forex market.
We consider myself an experienced trader with a practical insight into the market, so we decided to write a simple article to understand and implement guide to forex trading, focusing on one pair at a time. This feature discusses EUR USD pair.
We have observed more than 95% traders are either losing or struggling to recover losses. Jumping from one forex robot to another, following some complicated self devised strategy on a hunch, placing trades on a gut feel etc – where every option seems more dangerous than the other. Then there is this very, very small group of people who are managing to break even with the help of one or two strategies, but do not seem confident to follow the rules, so sometimes even break some.
Less than 4% traders are out there who are doing long term trades, keeping an eye on the news, often complaining of sleepless nights fearing one economic report release or change of government in some country would bring an unexpected movement in their forex position….
And finally there are less than 1% traders making consistent profits and living a comfortable life off trading. They win more than they lose and enjoy a sound sleep on the whole leading a happy life as forex traders.
So to be able to trade like a professional – the first thing to do is to understand yourself as a trader, and then understand how forex market works and then finally concentrate on EUR USD as an important currency pair.
Once you have figured out which type of trader are you, you can start improving from there and get better. And once you’ve got a good hang of yourself and the market, this report will really come in handy.
Why Should You Do Forex Trading?
Forex is the largest market in the world, therefore the liquidity it offers is unmatched, the 24 hour market environment, and of course its profit potential are good reasons for anybody to trade forex. Leverage is another big reason why forex makes for an excellent trading instrument. Coming to, the last but not the least, feature of forex market is that the trends in this market last longer & are more clearly defined than in any other trading instrument.
What Is This EUR USD Trading Feature All About?
Many of our features discuss similar topics, but we really want you to read this one because it is going to provide you with the nitty-gritty associated with the EUR USD pair and also what goes into the mind of an experienced Forex trader, how he thinks about and trades the market, especially EUR USD currency pair on a day to day basis. This focus feature talks includes fundamental information and cutting edge strategies that are essential for a trader’s success.
We have been part of the Forex markets for a while; having spent years into this business, and being witness to many rise and falls, witnessed many move, many falls, swings, and spikes related to currency trading.
In this article we have focused on different aspects of professional forex trading, specially when it comes to the trading of the most favorite and popular currency pair which is EUR USD.
This EUR USD Trading guide is not about economic theories, Fisher, price equilibrium, etc as they are of negligible or say hardly any use in trading short term.
What we are going to learn is developing the skill and insight that will helps you predict the price. We all know from our respective experiences that there are times when even the best news is not able to lift the dollar, and the most inconsequential bad news is enough for it to nosedive… .
This is where the fine secret & realization lies that economic fundamentals have very little importance and what counts is – do we know where the sentiment is.
Understanding EUR (Euro) Basics:
EURO is the second largest currency to be in circulation after the US dollar. Ever since the time the Euro got introduced, it has gone to get acceptance and approval to become official currency for 16 countries that comprises the Eurozone. Euro is the second largest reserve currency after USD, and Eurozone is the second largest economic region, again second to the American economy.
This is the largest currency replacement, the world has witnessed till date. In 2002 Euro was adopted by 16 European Union Countries replacing their national currencies. Nations include Finland, France, Luxembourg, Belgium, Cyprus, Austria, Germany, Greece, Italy, Ireland, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
The European countries not using the Euro include Denmark, Sweden, and the U.K. Euro is supervised and looked after by the European System of Central Banks, which includes European Central Bank, and central banks in Eurozone.
European Central Bank, also referred in the trading circles as ECB is the one and only authorized body that has the power to design monetary policy, and has its headquarters in Frankfurt, in Germany.
All other members of the ESCB participate through printing, minting, and distribution of notes and coins.
EUR USD is great for currency traders who are jus starting out since he currency moves quite at a slow pace as compared to the other major pairs. Also, the EUR USD is correlated in a negative way to the USD/CHF & it is related to GBP/USD in a positive manner.
Salient Feature typically associated with EUR is as given below:
- Its regular and standard broker spread is found to be between 1-3 pips
- Daily range average for Euro is seen to exist between 90-100 pips
- Coming to the timing to trade the pair: The most relevant time to trade the currency is during Euro Session which runs between 0700 GMT – 1700 GMT.
Some aspects that may bring movement in the EUR USD rate:
The interest rate disparity or differential between the European Bank commonly called ECB and the Federal Reserve commonly referred to as FED are also responsible for bringing movement in the EUR USD currency pair.
Traders should know that dollar strength plays a role in driving the EUR USD currency pair lower.
Intervention on the part of FED also goes to weaken the dollar and in turn triggers EUR USD to go higher.
Trading Style For EUR USD:
EUR USD currency pair trading is suitable for new as well as experienced, and advanced forex traders. Recommended trading style includes Day trading and Swing trading.
Understanding USD (dollar) Basics:
The currency of the American economy is the Dollar (USD), and with time it has come to be the most reliable currency in the world. Despite efforts to tumble and displace the dollar, the recent economic downturn has clearly demonstrated the support that the US dollar enjoys and how it is a secured option for investors looking for a solid currency.
Economics is a complex subject and American Economics no less. To understand the dollar we would have to understand everything in detail – right from rise and fall in interest rates along with political pressures mounted by their structured labor groups.
Let us try to understand how USD works, which in turn will help us digest the US national economy. Besides this, the knowledge of the dollars’ past price chronology can also give insight into the Wall Street workings as well as Washington, D.C.
What we have to understand is that finally the dollar’s maneuverings are about cause and effect. When we try and see the dollar from the business owners and public policy makers point of view, we will know why the USD price is very important for different people.
Currency Quotes and Forex:
When traders or investors are said to be trading Foreign Exchange in the market it is understood that they are either buying currency pairs or selling them or doing both simultaneously which they could even be doing for more than one Forex pair at a time depending upon their preference, knowledge, trading skills, and budget.
Each currency pair is typical and therefore represented or written in a typical manner. And that’s the way it is supposed to be. The way two currencies are placed in a pair is indicative of a certain pattern. And therefore cannot be changed at trader’s whim. If the investor interchanges the position whether by default or design, then everything from knowledge, forecast, strategies, and logics to outcome of trade –will most certainly go for a toss.
The currency pair which comprises two currencies and has a fixed way of being positioned can be best explained like this – a special term has been coined for the currency that appears in the beginning of the pair and that term is Base Currency. Likewise the currency that appears in the second place – two terms coined are for it and they are Quote currency and Counter Currency. And the third term pr phrase that has been coined is for the pair. When two currencies are appearing side by side as a pair with a value – it is called Forex Quote.
Now when traders are trading the pairs, whether it is buying or selling them, what they do is assess a currency’s value in relation to the other. Where the base currency is always assumed and read in terms of single digit or one unit. And the second currency which is counter or quote will represent number of them required to equate the base currency.
For example, let us consider a currency pair – GBPUSD. Here GBP is a Base Currency. It is placed before USD. It is represented in single digit or in single unit. Here it is One GBP. And USD which appears at second place and therefore counter half of the currency represents number of USD that will be required to weigh same in value as one GBP. Coming to the Currency Quote – it will be read like this – One GBP is equal to so many US Dollars. Or `x’ amount of USD will have to be spent or shelled out by a trader if he wants to buy or own one GBP.
Another thing to be noted about trading these pairs, is that they are bought, sold, or even cited (quoted) based on what is called the `bid price’ and `ask price’. Both these are terms related to and used for broker’s that represents the prices at which they are willing to buy or sell the currency. Bid price is at what they are ready to buy and ask price is at what they are ready to sell.
Why Trade EUR USD Pair?
There are several good reasons to trade EUR USD. First of all, this is amongst the popular and widely traded pair across the globe in all markets, which helps the pair to provide liquidity that is needed to benefit from price changes.
The EUR USD is in fact the most densely traded pair because the EUR – Euro and the United States Dollar – both are treated amongst the most liquid currencies as lot of trading is happening with these currencies being part of the pairs. This is indicative of the fact that a Forex trader can continue to invest substantial volume of the money in a position/trade. They can also withdraw a large amount of profit with a very small scale of the market movement.
The EUR USD currency pair has tight spread, which under most situations gets to receive higher spread quotation from Forex trading brokers because of the reason that this one is more impulsive and volatile.
In other words – the biggest advantage of trading this pair EUR USD is that since it is a liquid pair a trader will be able to make bigger trades and will be paying smaller spreads.
How to Trade EUR USD:
Many traders in the forex trading business choose to trade selected currency pairs. Concentrating on limited and selected number of pairs helps them to gain a better insight into those currencies, their behavior, and reaction in typical market situation. This familiarity with their behavior helps traders to understand the nuance related to each currency.
The most popular currency pair is the EUR USD. After EUR USD, GBPUSD is the most popular and also the most volatile. It is said that one of the most popular trading robots/software was developed using the EUR USD pair.
Let us discuss why after all, the EUR USD currency pair is so popular amongst traders. Reason number one (as discussed earlier already), is because of the liquidity if offers. 2nd reason is because there are so many traders who think that trading this EUR USD currency pair is because it is quite predictable.
There are some very typical patterns which are associated with EUR USD. If traders are successful in getting a thorough hang of various market environments, and get their fundamentals cleared regarding tendency of this pair in various environments; they will be able to read, understand, and analyse the market with much better accuracy.
For example, one can associate EUR USD with one peculiar characteristic which is more than obvious so many times. That, the pair stands by Support Level & Resistance Level. And being able to find some good entries and exits is the `good news and outcome’ of this pair. When these levels are superseded or broken the trader and the market can expect new favourable avenues for some good trading happening in their favour.
Next, if a EUR USD trader learns to keep a watch on aspects that indicate excess of buying and selling happening, or points that exceed the bought and sold limits it will help them a great deal as these limits represent the reversal points.
In short, if a trader is keeping up with market movements and situations, learns to keep an eye on the reversal limit, and is also aware of level of resistance then striking profitable deals is a reality for him that he is bound to experience often.
Past few months have seen EUR USD trading match and correlate with the USA stock markets. As the DOW or S&P rise, EUR USD trading gets biased upwards. The reverse holds true in a market that is weak. Certainly this relationship is not going to remain like this forever and it will change based on the markets and economy changes. However, it tells us why trading EUR USD and also all the other currency pairs have a close relationship with the stock market.
For traders who are familiar with trading and want to understand the logic and fundamentals of trading this currency pair in short – its here. Technical analysis and also having the news and fundamentals into consideration is one of the best and easiest ways to trade EUR USD.
Another way to trade this pair is by breaking psychological barriers at 1.3000, 1.2000, and bump into a sudden economic news to ride on which can also push and make the EUR USD take a special direction strongly, without looking back!
Since the EUR USD pair has a negative correlation to the Dollar Swiss Franc i.e. USD/CHF pair, it is considered a safe option to evaluate both EUR USD and USD/CHF charts which will help a trader or investor to correctly and accurately predict future moves.
Suppose the USDCHF forms a strong resistance breakout while and EUR USD is still moving above its support, it will be more probable that EUR USD breaks below the support sooner or later. This also reflects the way USD/CHF pair likes to make the movements a little earlier than EUR USD. It means EUR USD follows the USDCHF movements most of the time.
Trading EUR USD can be as simple or complex as you make it. The final goal however is simple – booking profits from as many trades as you can on a daily, weekly, monthly basis.
Europe is a rather conventional market. France, Germany and Italy which are the largest members of the EU (European Union) generally have high budget shortfall that helps in keeping the interest rates extremely volatile this is especially felt when the same is compared with United States.
It is easy to see why EUR USD makes for such a popular currency pair worldwide. And for a trader to be able to strike profitable Forex trading deals, he will have to learn to keep up with latest in both European and the US markets.
The Federal Body, commonly known in currency and trading circles as FED, follows the free market approach and is generally seen to introduce necessary adjustments in rate of interest.
The core and consistent objective of the FED behind doing this is to help the dollar incline in one direction for as long as possible.
The traders should also not forget a very important lesson, that whether they are trading based on technical analyses or fundamental – they can’t ignore one for the other completely at any cost. Both analyses patterns should be seen in combination to make the most of the situation and minimize bad runs.
As experienced traders we already have a fair idea about Euro zone and its Hyper Inflation tendency, and while this is being discussed most of us are immediately reminded of the inflation that struck Germany which lead to a rough patch as a consequence. How it hit bad patch following the First World War.
And it is to safeguard against a similar experience that struck in the past, is that ECB has a well thought out `set of policies’ to fight against inflation. The authorities at the helm ensure that no sooner has there been a change in rate of interest that inflation also has to be assessed all over again vis-à-vis the change.
This helps the trader to associate, compare, and assess FED against ECB and make good trading decisions.
We shall also discuss yet another impact that is associated with the situation of lowered interest rates where money is going everywhere across all markets around the Globe from America where currency traders stand a better chancre of getting higher returns on their investments thereby improving their yield a lot better.
Money was used to flow to Japan before. But as the country’s economy went out of hand and as it had to experience a decade of upheaval – because of this situation –Japan was left with little choice and had to bring down its interest rate nearly to zero. Money flow went in the direction of the Euro Zone.
Now this inflow of money from USD to Euro signifies that USD tends to become weak or loses its strength, and in turn Euro gains strength and becomes robust.
For traders to use fundamental/news analysis – they may have a rough idea regarding the way that the market will conduct itself in the six to 12 months. This is where as technical analysis reflects how the price will take final shape and how it may be looking in the coming few minutes, few hours, few days or even few weeks.
Technical analysis is a way of trading which helps the trader to observe and catch the right signal at the right time to enter and exit a trade. EUR USD is one of the most highly traded currency pairs across the globe with a kind of what can be called an extraordinary liquidity.
This is one reason for its popularity. There is another similar currency pair that trades as highly heavily and that pair is GBPUSD. And as we are already aware that since Great Britain does not form a part of EMU, (stands for European Monetary Union) that is the reason for the relation between Euro and the Great Britain Pound – GBP not being so strong.
Sometimes going with the flow and taking a risk by trading the cross pair EURGBP can help a trader get an important clue / insight into the working and how the EUR USD pair is most likely to move or react.
How The Stock Market And Also The Interest Rates Impact The EUR USD Trading:
When rise in stock prices is noticed it is considered a good sign which means the economy is getting better. This movement provokes investors to generally withdraw their money from the US bonds, and put the same into equities. Thus the investor gradually begins to feel more and more at ease and takes more risk.
Therefore, the extra money will be taken out of the assets that are related to US and its economy, which in turn will cause the USD to go down, and so EUR USD goes up.
Additionally, the lower interest rates in the United States of America than in any other country in the world, flows the money to the other markets with different situation that will prove to be in their favor. Interest rates increase will make the USD stronger, and the stock markets weaker.
Economic News & EUR USD Trading:
Traders need to understand and keep an important point in mind before trading EUR USD – that the countries like Germany, France, Italy, and Spain are responsible fop over 3/4th portion of the Eurozone’s GDP. Therefore, the economic news and statistics related to these countries, along with the USA impact forex trading outcomes and volatility in a huge way.
Most EUR USD traders are extremely wary about trading while they are expecting any big news announcements which can cause several unpredictable fluctuations.
When Can You Make Money Trading EUR USD?
Anytime! Strangely enough, the more volatility there is in the market, the more profit, one can make.
Anybody can do it provided one knows the rules of the game. The irony is that rules are none – for the market – rules are for you – the traders. We have to learn the skill to read and analyze the market well, not be in a hurry to win trades overnight, and above everything keep a watch – from natural calamity related news, to any other kind of breaking news, election and presidential elections related news, strikes etc. Any news, whether it is good or bad has the power to create movement in the market which may prove to be good for some and not so good for others. And this is where opportunity lies for the trader; it is his best time to trade currencies, provided he has kept in mind and eyes open.
Are Major Currency Pairs Correlated In Their Price Movement?
For traders who looking for the answer in one word – it is YES. There are so many major currency pairs that are correlated to each other. They move in almost an identical fashion when compared with each other.
We shall try to understand this phenomenon with the help of an example. The EUR USD and the GBPUSD are always seen moving in tentatively to the same direction generally- though, not exactly 100% similar. The GBPUSD fluctuates more than EUR USD. However, when EUR USD forms an up or down trend, a trader can quite safely assume that the GBPUSD is moving following the same direction, and so we can state that these two – the EUR USD & GBPUSD are correlated.
USDCHF has a negative correlation with EUR USD, meaning if the EUR USD is in an upwards rally then it is more than likely that the USDCHF currency pair is going downhill. Let us say a trader keeps the both the charts of the same time frame for EUR USD and USDCHF, and holds them side by side in opposite direction. Then strange as if may sound but he will find that both charts look almost similar. This happens because the two USDCHF and EUR USD pairs have a negative correlation.
Trading based on Correlation aspect can spell success for a trader provided he can approach the tool in the right mind. Clarity in this aspect is bound to minimise the risks that he is otherwise likely to take.
This reality check, for one, will save the trader from indulging in trades with stakes that are likely to be two times higher one of each side, and two, is saves him from trading against the positions which he might be holding at that point of time.
Let us understand it more clearly with the help of an example. Let us suppose, that a Forex Trader decides to take a long position with both pairs, i.e. the EUR USD as well as GBPUSD simultaneously. This, even as a layman can see, is indicative of double risk situation which a trader in his right mind would rather do without. What he should instead be opting for, assuming that the set up will remain as it is, is to go ahead and identify a pair that gives an impression of being more stable and go with just that one pair.
Same situation, that of doubling of risk on the part of trader arises when he decides to long position his EUR USD, and takes short position with USDCHF. Traders who trade this particular pair have often shared their observation that the fluctuations are too edgy when it comes to this pair, especially compared to currency pairs such as the EUR USD and GBPUSD. And this is one of the key factors, the pair’s peculiar choppy characteristic because of which not too many people go for trading this pair.
So, traders wishing to trade any of the European currencies with USD, prefer to go for combining USD either with EUR and GBP. This does not mean that traders should not opt for USDCHF but the leaning is generally towards the former tow pairs because they seem to offer opportunities that are a lot more lucrative.
EUR USD is especially a real favourite option amongst retailers. Since trading for this pair happens in big volumes, the liquidity it offers is also obviously quite high. This pair takes a lion’s share of twenty seven percent of total trading volume. And the next pair to follow in the in popularity chart is the USDJPY – which is calculated between twelve to thirteen percent of total trading, and the third popular pair is GBPUSD.
Support and Resistance Lines/Levels:
Apart from 100SMA on the daily chart, a trader can explore the possibility to use regular support/resistance lines/levels. One can use Fibonacci levels and Bollinger Bands with the default setting (20), even with their default parameter. These will work best to identify strong support/resistance levels while trading EUR USD. To the extent that traders can use these for entry (stop loss) & exit (profit) levels.
Trading Signal Tools:
Stochastic Oscillator is a momentum indicator that can be effectively used to trade EUR USD with its default settings. Don’t ignore this indicator as it is the most favorite indicator for many traders to trade EUR USD.
To be able to successfully trade the EUR USD, a trader can also consider measuring the daily price range. When he notices that the range is falling around the average range of the past a few days then it is to be assumed that EUR USD may make a new movement very soon. A Trader can also identify the most suitable and effective trading session for EUR USD. For example, the most potential time to trade EUR USD is when the European session is opening, or when some critical economic data for important European countries (Euro zone countries) is released.
These are but just a few and common techniques and methods, which sync very well with trading EUR USD, because these tools are tailored for character of EUR USD currency pair.
How EUR USD Influences and Impacts the World Economy:
EUR USD is amongst the most traded pairs of currencies in the world. This pair is also called Major as it constitutes the largest chunk of the foreign exchange market & exhibits high market liquidity.
EUR USD is the most popular pair with the lowest spread. EUR USD currency pair is the most appropriate choice for traders who are just starting out. It’s a good currency pair for beginners because the pair responds well to basic technical studies and rules, which new traders learn in the beginning. These are amongst first few lessons that the new trader is given and when he applies them to trading he gets to see the impact and result in real time. This helps him build confidence in his thought process, strategy building and above all trading in real market.
EUR USD pair does not have the tendency to be very fickle or impulsive under normal and moderate market environment. In a market condition when things are in control, the pair can be traded safely with minimal risks & closer stops.
Looking at the pair from the fundamental point of view – EUR USD gets quite a lot of global economic coverage. This makes the EUR USD pair easy to follow and keep a watch on.
The EUR USD is affected due to the things that impact the value of Euro and/or U.S. dollar vis-à-vis each other as well as other currencies. Therefore, the different interest rates between the European Central Bank (ECB) and the Federal Reserve (Fed) affects the price of the currencies.
For example, when the FED decides to manipulate the markets to help the USD to become stronger, the value of the EUR USD cross tends to decline, because the US dollar has strengthened as compared to the Euro.
It should also be remembered by traders that the EUR USD pair is negatively correlated to USD/CHF & positive correlation to the GBP/USD. This is because of the positive correlation that the Euro, the Swiss franc and the British pound share.
US Trade Balance Report is an official monthly release which helps traders to weigh the factors which influence value of EUR against US dollar.
A trader should bear in mind that EUR USD pair is highly influenced or affected by the Trade Deficit status. The course that EUR USD takes is dependent on the way trade deficit status stands. If deficit happens to increase value of Euro is also bound to increase as compared to USD.
Information for Traders Using Systems:
We do hope that different sections of this report will familiarise traders with various aspects of EUR USD trading. We’d like to advise traders to study the pair thoroughly, learn about both the currencies and economies independently and interdependently, they should fine they should identify a strategy that will blend well with their style and other trading preferences.
Traders should carefully scrutinize the strategy thoroughly before finally going with it. They should also try putting the strategy to use in various market conditions, and different methods, fine tune it wherever required, and understand the uniqueness it offers under various situations, before accommodating it as a part of their trading routine.
For traders who trade after 5 pm EST, it is difficult to suggest a good forex trading system, since by this time the trading volume has decreased, and sideways price movements are difficult to profit with. If a trader can’t trade during active market hours, it is suggested that he/she uses larger time frames; daily charts would be most suitable.
What Should Simple Trading Strategies Mean to a New EUR USD Forex trader?
As a trader just starting out, you will come cross several self claimed masters of EUR USD currency pair trading. But finally it is up to you to choose the right guy and not get carried away with a blasting copy.
When you want to choose a particular strategy, you should try it first to know whether you understand it and does it fit with the type of trading you want to do.
The simpler the strategy, the better it performs. When we use the expression – simple – it means many things – it could mean easy to understand, easy to follow, and easy to execute. And besides that it also signifies that it is created by a person with a certain level of knowledge of the market behavior – which comes with experience.
Simple & straightforward – that’s ideally how one’s trading strategy is supposed to be. The key to success lies in the fact that the strategy be based on simple to understand market reality based logic and not complexities or confusion.
Trader’s strategy may include number of trading methods that he has devised keeping different types of economic conditions in mind. Whether it is Entry Strategy or Exit Strategy; identifying trends; risk management strategy; anything. Everything should be simple for a trader to understand.
The trader should also keep in mind that his knowledge combined with practical experience will help him devise his own strategies as he gains more experience in market which will add a unique quality to his trading skills.
For example a trader should aware that Elliot wave in combination with Fibonacci is a complex and an aggressive combination. Coming up with an array of price presumption options with the help of market analyses makes the whole trading experience an edgy affair. However with time as trader gains experience and learns to take control over this combination, it will lead him to a long and profitable career in trading ahead.
And as you get more and more involved in EUR USD trading you will be able to devise many such strategies that will make you a profitable trader and help you stay in business all your life, and for all you know, your children may inherit the empire from you making the innings longer than you ever expected.
We hope you enjoy reading this feature and more importantly find it useful and practical. We also hope you are able to implement what you have learnt here to your EUR USD trading. Wishing you all the very best! Keep patience and whether you win a trade or lose it – don’t lose your attitude – the attitude of learning your lesson from both situations.