How Do We Trade EUR/USD?
Suppose we check the internet and see that EUR/USD is currently trading at 1.1600. This means that 1 euro is trading at 1.16 U.S. dollars, so in order to purchase 1 euro, you would have to pay 1.16 US dollars. If the pair climbs, for example, to 1.1650 or 1.1720, this means that the euro has strengthened against the dollar. Conversely, if the pair has dropped, say to 1.1570 or 1.1520, this means that the euro has weakened against the dollar.
Like the stock markets, currency rates are constantly fluctuating. Traders are always looking to make a profit by ‘buying low and selling high’ – in the case of forex, this means buying a currency pair at a low rate and then selling it a higher rate.
We mentioned earlier that currencies are constantly fluctuating. Since the actual movement of currencies is usually very small, most pairs are quoted to the fourth decimal place, which is called a pip. In forex trading, the basic unit of measure is a pip.
Suppose we want to trade EUR/USD and the current price is 1.1620. If ten minutes later EUR/USD has risen to 1.1625, then it has increased by 5 pips. Although a pip is a very small number, a movement of even one pip can mean significant profit or loss for a trader, because forex trades are usually heavily leveraged (we will explain leverage shortly).
Let’s take a look at a simple example of how to trade EUR/USD and make a profit:
Suppose EUR/USD is trading at 1.1600. If you purchase 100,000 Euros, that would cost you $US 116,000. If later in the day EUR/USD rose to 1.1660, EUR/USD has increased by 60 pips – the value of your U.S. dollars has risen to $116,600, which leaves you with a tidy profit of $600.
When you trade EUR/USD and purchase 100,000 Euros with U.S. dollars in the above example, you aren’t expected to put $116,000 in your trading account. Rather, traders use leverage, which allows a trader to open a position which is much larger than the amount of capital which she needs to put down. If a broker is providing you with 100:1 leverage, this means that you can control a position of 100,000 Euros with only 1,000 euros in capital. While leverage allows a trader to control very large positions, keep in mind that leverage carries with it significant risk, so it is essential to always “handle leverage with care”. A key component of how to make money trading forex is making use of leverage in a responsible and disciplined manner.
History of the Euro Dollar Currency Pair
After the Second World War, European countries banded together to form close economic and political ties. This led to the creation of the European Common Market in 1957, which became the European Union (EU) in 1993. Currently, the EU has 27 members and boasts the largest economy in the world, with some 450 million consumers. The increased political and economic integration between European countries resulted in greater economic prosperity, but the lack of a common currency hindered the move towards a truly integrated European economy. Many readers will recall travelling in Europe and having to exchange their currency for French francs, German Deutsche marks or Italian lire.
Enter the euro. In simple terms, the euro is the official currency of the EU. The EU adopted the Maastricht Treaty in 1992, under which all EU members were supposed to adopt a common currency. However, not all EU members met the required financial regulations. As a result, when the euro was launched on January 1, 1999, only 11 countries adopted the euro as their official currency. At that time, the euro was used for accounting purposes only; actual bills and coins were not introduced until 2002 when the euro replaced the former national currencies.
Those countries which have adopted the euro are known as the eurozone. As the EU has grown over time, so has the eurozone. Currently, there are 27 countries in the EU, 19 of which have adopted the euro and constitute the eurozone. These include the major economic powerhouses of Germany, France, Italy and Spain. (The United Kingdom, which is in the process of withdrawing from the EU, never adopted the euro and maintained the British pound as its currency.)
Watch this video: What is the EUR/USD Forex Pair and How Can You Trade It? (05mins 23secs)
EURUSD Trading Hours
The forex market trades 24 hours around the clock during the week, but as a trader, you want to be engaged in the market when there is plenty of volume and volatility. This provides traders with a greater opportunity to profit on a position. If we analyse daily volatility, it is apparent that EUR/USD sees a peak in volatility between Tuesday and Thursday. The reason for this is that trading activity starts slowly on Sunday and picks up the pace on Monday before reaching its peak in mid-week. After Thursday, activity lessens and comes to a complete halt on the weekend. Thus, the best time to trade EUR/USD is mid-week.
When is the best time of day to be trading? The most active period for EURUSD is when the European and North American markets are open. The two largest markets, New York and London are open between 8:00 and 22:00 GMT. The ideal time to trade EUR/USD is when both of these markets are open, which a 3-hour window between 13:00-16:00 GMT. The biggest daily moves from EUR/USD usually take place during this window.
EUR/USD Trading Strategies
In order to be successful when you trade EUR/USD, it is imperative that you adhere to a EUR/USD strategy. The two most popular methods in forex trading are technical analysis and fundamental analysis.
- Technical Analysis
Technical analysis involves the study of price movement. Traders examine trends and patterns on a chart, which represent the historical movement of the currency pair. The identification of patterns is then used to predict future price movement. According to technical analysis, all current market information is reflected in the currency’s price. Technical traders will monitor parameters such as support and resistance levels, as well as indicators which are based on price or volume.An example of a EUR/USD strategy relying on technical analysis is “buy the breakout/sell the breakdown”. EUR/USD will often show limited movement for extended periods. This results in well-defined trading ranges, which eventually will be broken, either on the bottom (support) or the top (resistance). Once the range is broken, the movement of the pair can be substantial. Traders can take advantage of this movement, which can take the form of a strong rally or selloff.The basis of technical analysis is the use of charts. The most popular chart used by forex traders is the candlestick chart, which provides detailed information of an asset (in this case a currency pair) over different time periods. Technical charts can display an impressive array of information, including trend, volume, volatility, momentum and market cycles.
Don’t worry if, at first glance, a technical chart looks confusing, perhaps even intimidating. Any comprehensive online forex trading course will teach you how to read and use a technical chart. Technical analysis cannot, of course, predict the future. However, it can help identify trends and tendencies, which creates forex trading opportunities.
- Fundamental Analysis
Fundamental analysis examines economic, social and political forces and developments that may affect the movement of currency prices. Such events often affect the economy of the currency being traded. The most important events include Gross Domestic Product (GDP), employment reports, inflation and interest rate announcements. These economic and political events are known as ‘fundamentals’. Generally speaking, if a country’s economy is doing well, this will result in a strong currency.Let’s take a look at some examples of how fundamentals can affect the direction of a currency. If the US releases an employment report was better than expected, this would be a positive development for the US dollar and would likely send EUR/USD downwards. Suppose that the U.S. Federal Reserve were to raise interest rates – this would probably send the dollar higher (which means that EUR/USD would weaken). Conversely, if a German inflation report was stronger than expected, this would be a positive development for EURUSD and would likely send EUR/USD upwards.
A major political development could also cause a currency to fluctuate. If the UK and the European Union were to suddenly announce that they had reached a post-Brexit agreement, the Euro would likely soar, sending EUR/USD to higher levels. When you trade EUR/USD, you should be paying close attention to the fundamentals that are being released on that day (and several days ahead). An important tool for forex traders is the use of an economic calendar, which lists economic and political events that may have an impact on the forex markets.Both technical and fundamental analysis is used for forex trading, and some traders will prefer one method over the other. Each method or both of them can be utilized when you trade EUR/USD.
- End of Day Trading Strategy
Forex Trading Platform
Once you are ready to trade forex, you will need to choose a forex broker. This enables you to trade Euro to USD forex live on the forex market. However, it is highly recommended that you first become familiar with a forex platform by first opening a demo account; this allows you to trade EUR/USD in a practice format, without the risk of losing any funds. Once you are comfortable with the trading platform, you can then engage in live trading.
EUR/USD forex trading is the most popular form of forex trading. We hope that this blog has provided some useful insights on how to trade EUR/USD. Whether you are a novice or an experienced trader, EUR/USD remains the most heavily traded currency pair, since it represents the two largest economies in the world.
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