Ins and Outs of Trading the EUR/USD Currency Pair
The US Dollar and the Euro are two of the most prominent and well-known currencies in the world. The Euro versus US Dollar (EUR/USD) currency pair has the largest global trading volume, and is therefore the most traded currency pair. Whether you find the instrument easy or difficult to trade on, it's a not a pair that many traders neglect, due to its daily volatility and price movement. This article provides a detailed account of all the angles connected to Euro/Dollar trading, EUR vs USD strategies, Euro Dollar news, and much more. It will mention the top strategies that readers should consider, and the various factors and forces driving the price movement and direction.
The Basics of the Euro Dollar Currency Pair
The US Dollar (USD) and Euro (EUR) are official currencies of their respective economic zones in the US, and the nations within the European Union. The FOMC (Federal Open Market Committee) is a branch of the Federal Reserve (FED) that determines the direction of monetary policy for the US, which in turn impacts the value and perceived value of the US Dollar. The European Central Bank (ECB) is the main central bank for the Euro and the Euro zone, and has a similar impact on the Euro currency.
Both currencies are part of the Foreign Exchange (Forex) market. In the Forex market, the price of one currency moves up, down, or sideways versus another currency, which is referred to as a currency pair. The Euro (EUR) and the US Dollar (USD) form a currency pair which is known as the Euro/Dollar, EURUSD or EUR/USD. Both the EUR and the USD also form currency pairs with other currencies such as, the Euro versus the Great British Pound (EUR/GBP) or the US Dollar versus the Canadian Dollar (USD/CAD).
The price movement of the EUR/USD reflects the change between the Euro and Dollar. Here is how it works:
- When the price of the Euro Dollar goes up (for instance from 1.15 to 1.17) the Euro becomes more valuable and the USD becomes less valuable.
- When the price of the Euro Dollar goes down (for instance from 1.22 to 1.19) the Euro becomes less valuable and the USD becomes more valuable.
- The opposite is true for those that use the USD/EUR abbreviation (USD versus EUR goes up, then USD becomes more valuable). It's important to note that this version of the abbreviation is not common.
When the price moves up or down, it indicates that one currency is becoming stronger, or the other one is becoming weaker, or even both. If the EUR/USD is moving up, it could mean that the Euro is becoming stronger versus the US Dollar, or it could mean that the US Dollar is weakening - or both. Regardless of what is driving the price change, the fact remains that traders can observe the current balance of power by simply watching price movement within the Euro Dollar currency pair.
Euro Dollar Most Traded Currency Pair
The US Dollar (USD) is the world's most traded currency, and the Euro claims the second spot, according to a Central Bank Survey conducted in 2016. The USD takes a daily share of 87.6% of all currency related trade activity, which is 2.79 times as much as the Euro's share at 31.4%.
There are a couple of conclusions that can be considered:
- The US Dollar's lead is enormous, the USD has the largest daily share by far.
- It does not come as a surprise that the EUR/USD is a highly traded currency pair, as it incorporates the world's first and second highest valued currencies.
The rest of the top five is comprised of the Japanese Yen with a 21.6% share, Pound Sterling at 12.8%, and the Australian Dollar at 6.9%. The table below displays percentages for the entire top 10 currencies.
|Rank||Currency||Currency symbol||% daily share (April 2016)|
|1||United States dollar||USD (US$)||87.6%|
|3||Japanese Yen||JPY (¥)||21.6%|
|4||Pound sterling||GBP (£)||12.8%|
|5||Australian dollar||AUD (A$)||6.9%|
|6||Canadian dollar||CAD (C$)||5.1%|
|7||Swiss franc||CHF (Fr)||4.8%|
|9||Swedish krona||SEK (kr)||2.2%|
|10||New Zealand dollar||NZD (NZ$)||2.1%|
|Source: Triennial Central Bank Survey Foreign exchange turnover in April 2016. Data range: 11 December 2016 - Retrieved 22 March 2017.|
The currencies with a higher daily share are usually the most interesting currency pairs for traders, because price movement tends to be stronger and more regular from an intra-day, and daily basis perspective , in comparison with less frequently traded currencies, which we will explore now. Most traders tend to stick to "major" currency pairs such as the EUR/USD, GBP/USD, USD/JPY, EUR/JPY, GBP/JPY , whereas some traders venture into lesser known currency crosses such as GBP/AUD, EUR/NZD, CAD/JPY. The most popular however, is perhaps the Euro/Dollar, as it's the most traded currency pair in the world. The "exotic" currency pairs, such as, Czech Crown (CZK) versus Mexican Peso (MXN/CZK) or CHF/JPY (Swiss Franc versus Japanese Yen) are often more difficult to trade due to lower volatility, and are not recommended for beginning traders.
Eurodollar News and Factors Impacting EURUSD
There are multiple factors that impact the price movement of the EUR/USD currency pair. These factors are usually grouped together as follows:
- Fundamental analysis
- News events and data releases
- Wave, price, and technical analysis (including indicators)
The macro economic data of a country like the U.S. or an economic zone like the EU indicates the long-term direction of their economies. The relationship between them decides how the price of the EUR/USD currency pair behaves. The most important economic data is connected to Euro and US Dollar interest rates, inflation rates, unemployment figures, and balance of trade numbers (import and export). You can find these economic announcements, figures, statistics, and associated forecasts through our Forex calendar, if you are interested in tracking them as they are released.
Additionally, messages from the FED and ECB are also critical, as they convey the view of the main decision makers on the board, with regards to the current and future economic outlooks within the U.S. and EU. Fundamental analysts evaluate these factors and try to assess the directions of these numbers, and the impact they will have on each currency and currency pair.
News Events and Data Releases
There is a list of economic data that is released every day for multiple currencies. Not all economic data figures and news events are equally important for all currencies. Of course, the Euro zone production numbers are important for currency pairs with the Euro. To indicate whether the news is expected to be important or not, Admiral Markets uses a color code system for indicating important (red), medium (yellow) and lower (green) impact news in its Forex Calendar.
There are a few events that will impact the entire market, which include among others, the NFP (Non-Farm Payroll) in the U.S, and the FOMC interest rate decision for the U.S. The economic data impacts prices because it provides information about whether the U.S. and the EU are performing better or worse in comparison with the past. There are also expected figures that are determined beforehand, and analysts can compare the actual numbers to the expected ones, and see if there was a positive or negative change.
Wave, Price and Technical Analysis
Traders also use charts for their analyses and trading decisions. These traders analyse the EUR/USD graph to understand the previous and current prices, which help them assess whether there are any potential trading opportunities in the future.
There are three main branches for studying price, which are:
- Technical Analysis: reviews trends, patterns, support and resistance levels using indicators such as MACD and Keltner channel, and tools such as trend lines and Fibonacci.
- Price Analysis: reviews price action and, for instance, Japanese Candlestick patterns, for understanding how all factors impact the flow of price. These patterns can indicate whether the price is moving up or down.
- Wave Analysis: reviews price patterns via the Elliott Wave theory, which explains that price moves with the trend in five waves, and retraces in three waves. Wave analysts study past waves to determine the current and next bullish, bearish, corrective or impulsive waves.
Of course, last but not least, traders can also use a combination of some, or all of the factors mentioned above as explained in the Admiral Markets Forex 101 course.
Strategies for Trading the Euro Dollar
The Euro Dollar price tends to move up and down a lot during the trading day and week, which offers opportunities for traders to benefit from the price swings. This is how traders can capitalize on such price movements:
- Traders can enter a long or buy position if their analysis indicates that the EUR/USD has a better chance of moving up (compared to the current price) and attempt to sell at a higher price.
- Traders can enter a short or sell position if their analysis indicates that the EUR/USD has a better chance of moving down (compared to the current price) and try to buy at a lower price.
- Traders can choose not to enter the market and wait to see if their analysis indicates indecision.
There are dozens of strategies available for each analytical category. Whether you are trading based on fundamental analysis, economic data, technical analysis, price analysis or wave analysis, there are multiple ways of approaching the Forex market in general, and the EUR/USD specifically. Besides existing methods, traders are also free to develop their own trading strategies, but be aware that all methods need to be properly tested. The best way to do conduct such research is by testing through:
- Checking your ideas in the past via a Expert Advisor (EA), and manual back testing
- By forward testing via a Demo account or a real trading account.
With fundamental analysis, traders mostly focus on long-term position trades which are aimed at larger swings, and which could take weeks, months, or even whole financial quarters. The strategy is similar to EUR/USD investing, as it is long-term oriented. Traders try to trade large economic discrepancies and trends, for instance the EUR/USD increasing from 1.05 to 1.25.
News traders react quickly to data releases. They evaluate the available data and compare it to the previous and forecasted figures. Then they decide whether this will be interpreted as a positive or a negative, and could decide to base trades on that judgement. Some traders use technical analysis on very low time frames such as the 1 or 5 minute charts, to add a different way of analysing news, and potential setups.
Technical, price, wave
The main benefit of trading the EUR/USD is that it reacts well to technical, price, and wave strategies. The good news with that is that these elements offer a large mixture of possibilities to use and create trading systems. The wide range of methods, indicators, and tools provide traders with infinite ways to tackle the market. That being said, traders who use one or all of these three methods are usually intraday traders (who open and close in one trading day), intraweek traders (who open and close in one trading week), or swing traders (over a maximum of multiple weeks).
The trading systems are also mostly focused on five different types of scenarios:
- With the trend setups
- Breakout setups
- Bounce setups
- Reversal setups (against the trend)
- Range setups (no trend is visible)
Each of the three segments - technical, price, and wave - have their own methods and tools, although keep in mind that this can vary widely from trader to trader as well. In general, they will use the indicators to determine entry and exit spots to gain an edge and profit in the long run. The indicators help avoid spots with lower probability, and to choose zones with higher probability. This is valid in the long-term, but not case by case, because trading always remains a probability, and absolute certainty can ever be achieved.
- Technical analysis strategies are often based on indicators such as the RSI (Relative Strength Index), ATR (Average True Range), Keltner channel,Pivot Points, MACD, and many more. They look for probable bounce or breakout spots using these indicators. For instance, a breakout above the Keltner channel could confirm a potential EUR/USD long setup. Traders could also use the indicators for determining a pullback within the trend, or the reversal spot within a range. If you are interested in using the Keltner channel indicator, why not consider using Admiral Markets' own Keltner channel? And see how it compares with the regular one.
- Price analysis strategies focus on understanding the sequence of bars or candlesticks to determine whether the price is likely to continue, break, bounce, or reverse. The candlestick lows, highs, opens, and closes provide critical information about price movement. For instance, a EUR/USD daily candle close that is far from the candle high could indicate exhaustion of the trend.
- Wave analysis strategies base their decision on wave patterns. For instance, an EUR/USD 4 hour chart could see a bullish wave 1-2 pattern, and price bouncing at a 61.8% Fibonacci support level. A wave trader could take a long entry at or after the reversal to try to trade the expected wave 3. Keep in mind that all strategies should work with a stop loss (or exit point if the trade goes against your expected direction) and should exercise proper risk management.
Best Time for Trading the Euro Dollar
The Forex market, including trading with the Euro/Dollar, is open for 24-hours a day, 5 trading days a week. There are only two non-trading days per week, or 48 hours where the market is closed. Traders can start trading with Admiral Markets between 5pm EST or 9pm GMT on Sundays till 4pm EST or 8pm GMT on Fridays. The best time for trading the Euro Dollar, just like any other currency pair, is to trade it when the market is active, which means that there is the presence of decent price volatility and movement.
Currency pairs tend to be more active when one or both of the currencies are operating in the usual business, and the stock market hours of that country or economic zone. Here is an overview:
- The Euro for instance, is most active between 8am to 4 or from 5pm local European time.
- The same is true for the US Dollar which is most active between 8am EST to 4pm EST.
- There is a two to three hour overlap when both the European and the American market are open, which tends to offer a period with the most volume and volatility.
Generally speaking, the Euro Dollar strategies can be best traded between 7am GMT till about 8pm GMT, which is when the chart shows the most price volatility. Before and after the price movement slows down significantly. But the best period appears to be the overlapping hours between 12pm GMT to about 3pm GMT when the markets in the US, London, and Europe are open.
Source: thebalance.com - ''Best Time to Day Trade the EUR/USD Forex Pair''/ ''Volatility In Pips EUR/USD Per Hour Of The Day''
The higher volatility is especially useful for traders that trade:
- With the trend
- Breakout setups
- Intraday Euro Dollar trading strategies
The lower volatility periods could still be interesting to trade in the following two cases:
- A trader creates a special strategy tailor made to this environment, which often means trading ranges and false breaks
- A trader finds an entry at an earlier spot before the market activity increases
Although the usual time when price moves remains more or less stable over time, the volatility of the price does fluctuate on a daily, weekly, and monthly basis. At certain times, the Euro Dollar will move more or less due to changes in factors impacting the currency pair:
- News events
- Releases of economic data
- Press conferences of Central Bankers
- Changes in macro economic outlook
- Technical analysis aspects
- Chart patterns and wave patterns
Platform for Trading the Euro Dollar
The best euro-dollar trading platform for trading the Euro Dollar currency pair is arguably the MT5 Supreme Edition. The MetaTrader (MT) platform offers a charting platform that is easy to use and navigate. Traders can view the EUR/USD currency pair, and a wide range of other financial instruments, including CFDs, commodities, and stock indexes. The Supreme Edition plugin from Admiral Markets offers a long list of extra indicators and tools that are not a standard part of the usual MetaTrader package. The additional features include, but are not limited to, the sentiment trader, the mini terminal, the trade terminal, the tick chart trader, the trading simulator, mini charts perfect for multiple time frame analysis, and an extra indicator package including Pivot Points and the Keltner Channel.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.