The US Dollar and the Euro are the two most traded currencies in the world, according to the Bank for International Settlement (BIS). And EURUSD is the most trade pair. The question then is, why trade only EURUSD when there are so many other pairs to trade?
EUR/USD TRADING BASICS:
- The US Dollar (USD) is the world’s dominant currency and the Euro (EUR) is the second most-traded.
- As a result, business in EUR/USD accounts for almost a quarter of trading in global foreign exchange markets according to the BIS triennial report, which covers institutional trading.
- EUR/USD is a highly liquid pair.
WHAT IS EUR/USD?
Once every three years the Bank for International Settlements (BIS) conducts an in-depth survey of the global foreign exchange (FX) and over-the-counter (OTC) derivatives markets. The most recent look was in April 2019 and it emphasized again just how important the US Dollar and the Euro are in the currency markets.
It calculated that the US Dollar was on one side of 88% of all trades, with the Euro in second place at 32%. Trading in EUR/USD accounted for almost a quarter of all FX trades, according to the BIS survey.
FX MARKET TURNOVER (APRIL 2019 IN PINK VS APRIL 2016 IN BLUE)
WHERE TO TRADE EUR/USD
Because trading in EUR/USD is such a high percentage of the total, the pair can be traded in any of the major currency centers. The UK, the US, Hong Kong, Singapore and Japan, as well as smaller centers such as Australia. In these major centers, retail investors engage in trading with a Registered Foreign Exchange Dealer. These act as a counterparty to all of its customers’ trades.
The period between the close of US exchanges and before Asian markets open is typically the most reserved period for trade during a standard day. In contrast, the crossover of European late afternoon and morning New York trading hours is normally the most active.
WHO TRADES EUR/USD?
The depth and liquidity of the EUR/USD market allows for all classes of traders to be active. This includes central banks, investment banks, commercial banks, fund managers, corporates, retail traders and many more. Some, like the corporates, may be hedging their exposure. While others are investors and some act in a speculative capacity. For retail traders in particular, it is particularly attractive because spreads can be tight. Meaning the cost of buying and selling can be held low.
TIPS FOR TRADING EUR/USD USING FUNDAMENTAL ANALYSIS
As with any currency pair, it is crucial to pay attention to both sides of the equation. In the case of EUR/USD, it is important to monitor what is happening in both the US and the Eurozone.
It is affected by economic data on both sides of the Atlantic. By Federal Reserve and ECB decisions, by US and European governments’ actions, by political developments, by the spread between government bond yields in the US and Germany and numerous other relative factors.
Note, for example, that when the ECB eased monetary policy in June 2014, EUR/USD found itself in a prolonged period of weakness that lasted until March the following year.
EUR/USD PRICE CHART, WEEKLY TIMEFRAME (AUGUST 26, 2013 – MARCH 11, 2021)
Moreover, EUR/USD is a good barometer of general market sentiment. The US Dollar is widely seen as the safest of safe havens for investors looking to reduce their risk, so EUR/USD tends to fall when traders are pessimistic and rise when they are more willing to look at riskier assets, even though the Euro is by no means the riskiest.
TIPS FOR TECHNICAL TRADERS IN EUR/USD
Because turnover is so high in EUR/USD, technical strategies tend to work well. Some traders will use one of the many technical techniques in isolation while others will combine fundamental and technical analysis. Perhaps using the former to decide on a strategy and the latter to determine entry and exit points.
Note in the chart below, for example, that when the 14-day relative strength indicator (RSI) gave an “overbought” signal in early March 2020 there was a swift move lower and that when resistance from a trendline that marked the upper limit of a downward sloping channel was broken in mid-July 2020, there was an immediate move higher. This is only an example and past performance is not indicative of future returns.
EUR/USD PRICE CHART, DAILY TIMEFRAME (JULY 30, 2018 – OCTOBER 21, 2020)
ADVANCED TIPS AND GENERAL STRATEGIES
To summarize, the liquidity of the EUR/USD market makes it unique and appealing for retail traders just starting out – as well as those with years of experience. It may not be as volatile as many other markets but volume will be substantial enough for traders to navigate in and out of trades.
As well as fundamental and technical analysis, psychological techniques deserve consideration in any strategy. From gauging the mood of the general market in a spectrum between panic and mania to calculating personal risk management, this can often present the most crucial insight for analysis and strategy development.
The above reasons are why Instaforex Nigeria advices that traders consider trading the EUR/USD.
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Disclaimer: This post; “Why trade only on EURUSD”, is not a trading advice or instruction from Instaforex Nigeria but meant to create awareness to trade the EUR/USD currency pair.