EURUSD: Learn how to trade the most popular currency pair
The EUR/USD pair tracks the exchange rate between the euro and the US dollar. In fact, the fiber, as it’s commonly known, is one of the most actively traded pairs in forex and the reason why it’s not only classified as a major forex pair, but the leading pair among them.
With the US and Europe being the most powerful economic forces in the world, it’s not hard to understand why investors would find these two economies and their currencies a favorable asset.
Currency traders, however, don’t necessarily care about healthy economies in which to invest. Instead, they aim to profit from fluctuations between two currencies. Since the exchange rate of most currencies is constantly rising and falling according to various complex economic factors, currency pairs such as the EUR/USD may present countless trading opportunities throughout any given day.
EUR/USD is one of the most advantageous pairs to trade because of its high liquidity and trading volume. There are so many participators in this market that prices always remain competitive and traders enjoy instant execution of their orders which guarantees the best prices and low trading costs.
Trading the EUR/USD
The only thing a EUR/USD trader needs to do is to accurately predict if the EUR is going to perform better or worse than the dollar in order to open a buy or sell position respectively.
This is why you should focus on periods where the two economies aren’t both performing equally well. The exchange rate will fluctuate favorably only if one of the currencies is declining and the other is climbing, or in some cases when both are moving in the same direction but at a different pace.
If both currencies are moving in the same direction at the same time, then there won’t be any substantial exchange rate differential to profit from.
Let’s look at a EUR/USD trade example to showcase why:
According to our analysis of the charts and recently released economic data, the euro is positioned to outperform the US dollar and as such, we aim to open a buy position of 1 trading lot in EUR/USD.
The pair is currently trading at an exchange rate of 1.3100. In short, this means that one euro is equivalent to 1.3100 US dollars. Therefore, if the exchange rate goes up, each EUR you buy through the trade will be stronger and worth more in US dollars.
Our trade goes according to plan and a few hours later, the exchange rate has risen by 100 points to 1.3200, which means realized $1.000 of profit with an investment of $500. If the exchange rate moved much higher our profits would as well. However, if there was no movement at all we would actually lose some money due to the trading costs associated with opening a position.
Remember that we opened this position with a size of 1 trading lot, which is equal to $100.000 and each point in EUR/USD is roughly equal to $10. Therefore, 100 (points of profit) x $10 = $1.000.
Also, it’s important to note is that a position this size can be opened with an investment of just $500 because CM Trading offers all clients 200:1 leverage. Leverage gives you access to higher capital and allows you to control large positions that offer much greater profits. However, you should always keep in mind that leverage also increases your risk exposure and increases more of your capital to losses as well.
Leverage, your position size (trading lots) and profit targets can all be adjusted to suit your specific goals and risk profile, but in general, beginners should try to limit their position size as much as possible until they learn how to manage risk properly.
What makes EUR/USD exchange rates fluctuate?
Major financial announcements, geopolitical events and developments can all have a dramatic effect on the currency markets. As such, currency traders need to remain up to date with all news that may impact the markets on a daily basis in order to execute better-informed trades.
You can always keep track of all economic events that might impact the financial markets you are trading by referring to CM Trading’s economic calendar.
The EUR/USD pair is especially vulnerable to the changes in monetary policy and interest rates by the European Central Bank (ECB) and the Federal Reserve in the US. These central banks make frequent announcements that inform the public regarding their future policies which can affect how attractive foreign investors find their respective currencies.
A currency with increased interest rates is highly preferable to outside investors due to the higher returns. Therefore, central bank announcements are a key indicator into the future direction of a currency on the world stage.
Other financial data that are particularly important for the EUR/USD pair is the US employment and wage-growth data, which are released on the first Friday of each month. This report is called the Nonfarm Payrolls report and includes key information regarding the unemployment rate and new jobs added each month in the US.
When the numbers in the report are strong, the dollar is likely to outperform the euro by a great margin and therefore the exchange rate of EUR/USD will potentially drop as a direct result of this report.
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