Euro (EUR) traders speculate on the strength of the Eurozone economy, compared to its major partners. The relationship between the Euro and US Dollar (USD) marks the most liquid forex pair in the world, with tight spreads and broad price movement that supports a continuous flow of profitable opportunities.
While there are many ways to trade the EUR/USD pair, three simple strategies have been consistently effective. These can be executed by forex traders at all skill levels, with newer participants reducing position size to control risk while experienced players increase the size to take full advantage of the opportunities.
- With BREXIT on the horizon and a history of economic instability in the PIIGS countries, the euro has been popular among currency traders trying to profit off increased volatility.
- There are several ways to trade the euro versus the U.S. dollar as well as several other euro currency pairs.
- Here we describe just three basic strategies for trading the euro.
Buy or Sell the Pullback
The EUR/USD trend thrusts in both directions and carries the price from one level to another in a positive feedback loop that can generate considerable momentum. However, this rapid movement tends to fizzle out when the supply/demand equation shifts, often trapping latecomers in positions that will be excited for losses when the currency pair reverses and heads in the opposite direction.
The pullback strategy takes advantage of this countertrend movement, identifying significant support or resistance levels that should end the price swing and reinstate the initial trend direction. These levels often come at prior highs or lows as well as key levels defined by Fibonacci retracements, moving averages and the inception point of the original thrust.
Buy the Breakout/Sell the Breakdown
The pair often grinds back and forth within confined boundaries for extended periods, setting up well-defined trading ranges that will eventually yield new trends, higher or lower. Patience during these consolidation phases often pays off with low-risk trade entries when support or resistance finally breaks, giving way to a strong rally or selloff.
Good timing is needed to take full advantage of this simple strategy. Enter too early and the range could hold and trigger a reversal. Enter too late and risk escalates because the position will execute well above new support or well below new resistance. It’s often a good idea to reduce timing risk by opening a partial position when the pair breaks out or down and adding to it on the first minor retracement.
Enter Narrow Range Patterns
The pair will often rise or fall into a significant barrier and then go to sleep, printing narrow range price bars that lower volatility and raise apathy levels. Coincidentally, this quiet interface often marks a powerful entry signal for a breakout or breakdown. This strategy enters the position within the narrow range pattern, with a tight stop in place in case of a major reversal
This setup often prints an NR7 bar, which marks the narrowest range price bar of the last seven bars. Originally observed in the U.S. futures markets in the 1950s, this powerful but simple pattern predicts that price bars will expand in a sizable breakout or breakdown. It’s also a low-risk entry because the stop loss can be set very close to the entry price.
The Bottom Line
New and experienced Euro traders can execute these three simple but effective strategies that take advantage of repeating price action.
Equity traders can also apply these techniques with Currency Shares Euro Currency Trust (FXE), which tracks the forex pair in real-time. Leveraged and inverse ETFs can also be traded if you have the skills needed to manage the additional risk. ProShares Ultra Euro (ULE) offers double long side exposure, but it is thinly traded, at just 24,283 shares per day on average. ProShares UltraShort Euro (EUO) offers equal leverage to short sellers and greater liquidity, trading more than 700,000 shares per day on average.