Euro (EUR) traders speculate on the strength of the Eurozone economy, compared to its major partners. The relationship between the euro (EUR) and the U.S. 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 of all skill levels. Newer participants can reduce position size to control risk while experienced players can increase the size to take full advantage of the opportunities.
- The EUR/USD currency pair is the most liquid forex pair in the world.
- EUR/USD transactions represent approximately one quarter of all forex trades.
- Three basic ways to trade the EUR/USD can be executed by forex traders of all skill levels.
- Newer forex traders can reduce position size to control risk.
- More experienced players can increase position size to take full advantage of profit opportunities.
1. Buy the Pullback 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 executed for losses when the currency pair reverses and heads in the opposite direction.
The pullback strategy takes advantage of this countertrend movement. It involves identifying significant support or resistance levels that can end the price swing and reinstate the initial trend direction.
These levels often come at prior highs or lows as well as at key levels defined by Fibonacci retracements, moving averages, and the inception point of the original thrust.
2. Buy the Breakout and Sell the Breakdown
The EUR/USD 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 you risk executing 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.
The U.S. dollar (USD) is the world's most dominant currency: as of 2019, it's on one side of 88% of all forex trades. The euro (EUR) is the next most traded and is in 32% of all global trades.
3. Enter Narrow Range Patterns
EUR/USD 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. Using this strategy, a trader 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.
What Is the EUR/USD?
EUR/USD is a currency pair. It represents the relationship between the two most highly traded currencies in the world. In terms of value, a quote for EUR/USD will indicate the amount of U.S. dollars needed to buy 1 euro.
What Affects the Value of EUR/USD?
The EUR/USD currency pair exchange rate can be affected by economic and political conditions in the U.S. and the countries of the eurozone. Actions by the Federal Reserve and the European Central Bank can influence the spread. So can monetary policies of countries with major economies, such as Germany. To trade effectively, it's important for traders and investors to stay on top of what's happening on both sides of the Atlantic.
Can Technical Analysis Help Those Trading the EUR/USD?
Both fundamental analysis and technical analysis can inform forex trading and investment decision-making. Fundamental analysis involves using economic data to set trade entry and exit points. Technical analysis uses chart patterns of price action and associated technical indicators to time executions. Technical analysis may be extra helpful for those who trade actively in the highly liquid, fast moving forex market. However, you're not limited to one type of analysis or the other.
The Bottom Line
As described above, novice and experienced euro traders can execute the 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. However, it's thinly traded, with an average volume of 20,106 as of June 1, 2022. ProShares UltraShort Euro (EUO) offers equal leverage to short sellers and greater liquidity. Its average trade volume was 90,482.