Forex trading opens the doors to currencies from all over the world. However, the overwhelming majority of traders stick to trading EURUSD. Why? Read this article to understand and learn how to profit from trading EURUSD.
Early history of EURUSD
While this currency pair is the most traded Forex pair in the world, it is still pretty young.
The euro was first introduced as an accounting currency in 1999. Before, European countries used their own currencies, such as the German Deutsche Mark, the French Franc, and the Italian Lira. USD was the dominant global currency, and European currencies often fluctuated against it based on economic conditions in individual countries.
In 2002, the euro finally began to circulate as a physical currency. At first, the EURUSD exchange rate started at approximately 1.17. In the early 2000s, the euro initially depreciated against USD, reaching an all-time low of around 0.82 in October 2000. This was due to the strong performance of the US economy and uncertainties surrounding the newly introduced euro.
However, after 2003, it steadily appreciated against the USD, driven by economic growth in the Eurozone and a weakening USD due to factors like the US trade deficit and low interest rates. The EURUSD pair reached an all-time high of around 1.60 in July 2008.
What factors influence EURUSD?
GDP growth. Gross Domestic Product (GDP) growth is a primary indicator of economic health. When the Eurozone or US GDP growth rate surpasses expectations, it signals economic strength, which usually leads to a stronger currency. If the Eurozone’s GDP growth is higher than the US, the euro strengthens against the dollar, leading to a rise in EURUSD.
Inflation rates. Inflation rates directly influence the purchasing power of a currency. Central banks, like the European Central Bank (ECB) and the Federal Reserve (Fed), use interest rate adjustments to control inflation. Higher inflation in the Eurozone relative to the US could lead to a weaker euro, as it reduces the currency's purchasing power.
Interest rates. Interest rates set by the ECB and the Fed are among the most direct influences on EURUSD. Higher interest rates offer better returns on investments denominated in that currency, attracting more investors. If the Fed raises rates and the ECB does not, the dollar will strengthen, causing EURUSD to fall.
Elections. Elections in either the US or Eurozone countries can create uncertainty or optimism depending on the candidates' economic policies. If an election results in a government seen as fiscally responsible, the currency of that region might strengthen.
Market sentiment. Global risk sentiment often dictates the flow of capital. During times of high risk, investors tend to move towards safe-haven assets, often strengthening the dollar. If global markets are in a risk-off mode due to geopolitical tensions or financial crises, the dollar usually strengthens as a safe-haven currency, leading to a decrease in EURUSD.
Policy changes. Government policies on trade, taxation, and regulation can significantly impact economic performance and investor confidence. For example, US tax cuts could boost corporate profits and economic activity, strengthening the dollar and lowering EURUSD.
By staying informed about these factors, you can better anticipate potential movements in EURUSD and make more informed trading decisions.
How EURUSD differs from other pairs
EURUSD is generally considered less volatile compared to pairs like GBPUSD and USDJPY. The pair’s lower volatility is partly due to the size and stability of the economies involved — the Eurozone and the US — which reduces the likelihood of extreme price swings. Additionally, both the euro and the dollar are widely used as reserve currencies, which can dampen volatility as central banks around the world hold large reserves of both currencies.
On a daily basis, EURUSD tends to have a narrower trading range compared to pairs like GBPUSD, which can see more dramatic intraday movements. This makes EURUSD a popular choice for traders who prefer a steadier market, especially for longer-term trading strategies.
As for event-driven volatility, while EURUSD is generally less volatile, it can experience significant movements during major economic events, such as ECB meetings, US Federal Reserve announcements, or geopolitical events affecting the Eurozone. However, these movements are often more measured compared to the sharper reactions seen in other popular Forex pairs.
How to trade EURUSD: Technical analysis
Trading EURUSD requires a mix of experience, technical knowledge, and fundamental analysis. Let’s explore which technical analysis tools you can utilize to ensure a successful EURUSD trading experience.
Moving averages. MAs help traders identify the direction of the trend (upward, downward, or sideways). For example, if EURUSD is trading above its 200-day SMA, it’s generally considered to be in an uptrend.
RSI (Relative Strength Index). RSI helps traders identify potential reversal points. If EURUSD's RSI is above 70, it might indicate that the pair is overbought, signaling a possible pullback. Conversely, an RSI below 30 might suggest the pair is oversold, indicating a potential buying opportunity.
MACD (Moving Average Convergence Divergence). MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a currency pair’s price. The histogram represents the difference between the MACD line and the signal line. If the histogram moves above zero, it supports a bullish view for EURUSD; if it moves below zero, it indicates a bearish trend.
You should look for confirmation from multiple technical indicators before making a trade. For example, a bullish signal from a moving average crossover might be confirmed by RSI showing oversold conditions.
How to trade EURUSD: Fundamental analysis
For successful EURUSD trading, it is also important to conduct a fundamental analysis. Here is a list of important economic and political events that are important to consider for your trading strategy.
Non-farm payrolls (NFP). The NFP report often causes significant volatility in the Forex market, particularly in EURUSD. A stronger-than-expected NFP number typically strengthens the US dollar, leading to a decline in EURUSD, while a weaker-than-expected figure can weaken the dollar and push EURUSD higher.
ECB announcements. The ECB is the central bank for the Eurozone, responsible for setting monetary policy, including interest rates, and managing inflation. The ECB's regular meetings and press conferences provide insights into its economic outlook and policy decisions on interest rates, anti-inflation measures, and quantitive easing programs.
Fed meetings and decisions. Like the ECB, the Fed's decisions directly affect the US dollar's strength. The Fed's meetings and decisions are crucial for Forex traders.
Trade agreements. Positive trade agreements between the Eurozone and other regions can boost the euro, while agreements that favor the US might strengthen the dollar.
Global crises. Global crises like pandemics, wars, and other geopolitical conflicts can create significant uncertainty in the financial markets, leading to volatility in EURUSD. In times of crisis, the dollar often acts as a safe-haven currency, strengthening against the euro as investors seek security. However, as recovery prospects improve, the euro might regain strength, pushing EURUSD higher.
It’s crucial to understand that some events can have only short-term implications and may not lead to significant changes in the long run, and vice versa. Always consider this when developing your trading strategy.
EURUSD trading strategies
Depending on your preferred trading style, your approach to trading EURUSD will be different. Let’s break down the main EURUSD trading strategies and tools you should use to make profits from this Forex pair.
EURUSD: Scalping strategy
Scalping is a fast-paced trading strategy aimed at capturing small price movements in a highly liquid market like EURUSD. It is a very short-term strategy, with each position being held open for just a couple of minutes.
Use M1 and M5 charts. The 1-minute chart is ideal for scalping as it allows traders to capture quick price movements, while the 5-minute chart provides a broader context of the market direction.
Enable moving averages. For EURUSD scalping strategy, you will need to use a 50-period EMA and a 200-period EMA on the 1-minute chart.
Set up the RSI. For scalping, use a 14-period RSI. A reading above 70 may indicate an overbought market (potential sell signal), while below 30 indicates an oversold market (potential buy signal).
Use Bollinger bands. Use standard settings (20-period with 2 standard deviations). Bollinger Bands help in identifying volatility and potential reversal points. Price touching or exceeding the upper or lower band may signal a reversal.
Watch the trading volume. Volume indicators confirm the strength of a price movement. A high volume on a breakout suggests a stronger move.
Determine an entry point. First, ensure the 50 EMA is above the 200 EMA for a buy signal or below for a sell signal. Look for RSI to confirm a potential reversal. If the price touches the lower Bollinger Band in a bullish trend and the RSI is oversold, consider buying. In a bearish trend, look to sell when the price touches the upper band and RSI is overbought. Enter a trade when there’s a volume spike coinciding with other indicators.
Set a Stop-Loss. In scalping, set a tight Stop-Loss, usually around 2-3 pips away from the entry point. Place it just beyond recent support or resistance levels. Keep positions small to limit exposure. Typically, use no more than 1-2% of your trading capital per trade.
Exit the trade. Exit the trade when you receive an opposite signal (e.g., 50 EMA crosses back under 200 EMA, or RSI reaches overbought/oversold levels in the opposite direction). To limit the potential for losses, set a trailing stop or a Take-Profit order based on the average range of recent candles (e.g., 3-5 pips).
Record every trade. Record every trade, including the rationale, entry/exit points, and outcome, to track your performance and improve.
EURUSD scalping strategy
Scalping can be most profitable during high volatility periods, e.g. near NFP release. However, this is also a highly risky time for trading, so make sure you’re prepared to manage your trades under stressful circumstances.
EURUSD: Day trading strategy
Day trading is another strategy that aims to make profits from short-term price moves. Unlike scalping, however, the number of open positions is lesser, and trades can be held active for several hours at a time. That’s why day trading requires a different approach.
Use 15M, 1H, and 4H charts. The 15-minute chart is a good balance for day trading. It provides a clear view of intraday trends and allows you to identify entry and exit points without the noise of lower timeframes. The longer timeframes help identify the broader trend, key support/resistance levels, and significant price patterns.
Set up technical indicators. Use the 50-period and 200-period SMAs, the MACD (12, 26, 9), and Fibonacci levels.
Find an entry. Enter trades in the direction of the trend identified on the 1-hour or 4-hour chart. For example, if the price is above the 50 SMA and 200 SMA on these timeframes, look for buying opportunities. Look for bullish MACD crossovers (MACD line crossing above the signal line) for long positions or bearish crossovers for short positions. Enter at key Fibonacci levels (38.2%, 50%, 61.8%) after a retracement within a trending market. This increases the likelihood of catching the next leg of the trend. Confirm with the overall trend direction.
Manage your risk. Place a Stop-Loss order based on a percentage of your trading capital (e.g., 1-2%) or technical levels just beyond a recent swing high/low or above/below key Fibonacci levels.
Exit your trade. Exit trades at pre-identified support or resistance levels on the 1-hour or 4-hour chart. These levels often act as natural barriers where the price may reverse or consolidate. Extensions: If you entered on a retracement, consider exiting at Fibonacci extension levels (such as 127.2% or 161.8%) where the price might stall or reverse.
Don’t overtrade. Set a daily loss limit (e.g., 3% of your trading capital). If this limit is hit, stop trading for the day to prevent further losses and review your strategy.
EURUSD day trading strategy
Focus on the London and New York sessions for trading, as these are the most liquid and volatile times for EURUSD. The overlap between these sessions (15:00 to 18:00 MetaTrader time) is particularly favorable for day trading.
EURUSD: Long-term trading strategy
This approach is designed to capitalize on major market moves while managing risk effectively. Here is what you can do.
Study the D1, W1, and H4. The Daily chart will be your main field of action, but the Weekly chart will help you identify the larger trend. Use the 4-Hour chart to fine-tune entry points by looking for bullish or bearish candlestick patterns at identified support/resistance levels.
Prepare your indicators. For a long-term strategy, you can use 200-day and 50-day MAs, RSI (14), and MACD (12, 26, 9).
Confirm the trend. The first step is to confirm the trend on the Weekly chart. For long trades, the price should be above the 200 MA. For short trades, the price should be below the 200 MA.
Find entry points. On the Daily chart, ensure that the price is also aligned with the Weekly trend and is above (long) or below (short) the 200 MA. Look for a crossover of the 50 MA above the 200 MA for a long trade or below the 200 MA for a short trade. For long trades, ensure the RSI is between 40 and 70 after a retracement to a key support level (such as the 50% Fibonacci retracement). For short trades, the RSI should be between 30 and 60 after a retracement to a key resistance level. Confirm an entry with a MACD crossover (Signal Line crossing above the MACD Line for a long trade, or below for a short trade) on the Daily chart.
Set a Stop-Loss. Set an initial stop-loss just below the recent swing low (for long trades) or above the recent swing high (for short trades) on the Daily chart.
Exit your trade. Use Fibonacci levels to determine potential Take-Profit targets. Alternatively, exit the trade when the price reaches a strong historical resistance/support level identified on the Weekly chart. Once the trade moves in your favor by a significant amount (e.g., 1.5x risk), implement a trailing Stop-Loss to lock in profits as the trend continues.
EURUSD long-term strategy
Don’t forget that your focus should be on the long trend. Use the Weekly and Daily charts to identify and align with the major trend and don’t get distracted by minor price corrections.
Using these strategies, you will be able to profit from the most traded currency pair in the world. Always remember to manage your risk and be prepared for market volatility.
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