WHAT IS EUR/USD FOREX TRADING?
EUR/USD forex trading compares the value of two major currencies: the Euro and the US Dollar.
Another way of referring to EUR/USD is “trading the Euro” because you’re aiming to establish its value by comparing it to the US Dollar.
As is the case with any type of forex currency pair, the “base” currency is listed on the left. Therefore, in this example, EUR is the base currency.
The second currency listed is known as the “quote,” because it tells you how much of that currency you need in order to buy one unit of the base currency.
So, when you see a price listed for EUR/USD, it’s telling you how much USD it takes to buy one unit of EUR.
Today, EUR/USD is the most popular currency trading pair in forex. This is because these currencies are linked to two of the largest economic regions in the world: Europe and the US.
However, this hasn’t always been the case, as the Euro only came into existence in 1999.
It brought together almost every member of the European Union (EU) under a single currency. Once it came into light, EUR/USD was born, and the original Euro/Dollar exchange rate was 1.1686.
The History of EUR/USD
EUR/USD became a forex trading pair in 1999. It not only represents the relative values of EUR and USD, but it’s also a reflection of each economy (Europe and the US).
As two of the biggest economic regions in the world, Europe and the US are major players when it comes to trade deals, politics, and more.
This means the Euro and USD are important currencies on an international stage.
The benefit of this to you as a forex trader is that there’s always plenty of activity within the market. Exotic pairs focus on currencies from emerging countries which, in comparative terms, have weaker economies than Europe and the US.
This results in less liquidity among the non-major currencies and, therefore, fewer trading opportunities.
So, when you trade EUR/USD, you’re virtually guaranteed competitive prices and instant execution on buy and sell orders.
Factors that Influence EUR/USD
All forex pairs are affected by economic, political, and cultural events. Although one may have more influence than another at a particular point in time, all three intersect.
When it comes to EUR/USD trading, events on both sides of the Atlantic will impact the price.
However, it’s not enough to focus solely on the relationship between Europe and the USA. As allies, the two often react and respond to global events as a single entity.
Therefore, even if something happens outside of Europe or the US, the EUR/USD trading price could be affected.
The Role of EUR
The Euro is the main currency used within the European Union. Although certain countries within the EU haven’t adopted the Euro, it’s the default currency for the region as a whole.
Due to this reason, socioeconomic and political events in a member state can impact the value of the Euro. For example, if the German economy is booming, the Euro could be strong. If there is unrest in Italy, it could hurt the value of the Euro.
As well as employment rates, budgets, economic performances, and debt within each individual EU country, the Euro’s value can be affected by changes to the block as a whole.
If a new country is added to the EU, or one leaves (e.g. the UK and Brexit), it can impact the Euro’s value. Additionally, actions by the European Central Bank (ECB) can influence the Euro.
The Role of USD
The US is a single country but functions in a similar way to Europe in the sense that each state has a degree of autonomy.
This means, just as events in individual EU countries can affect the Euro as a whole, the Dollar’s value can also be altered due to socioeconomic and political events in certain states.
However, as a general rule, USD is more affected by events at a federal/national level.
Therefore, you can expect the currency’s value to change in light of the following:
- Changes to national debt and US GDP.
- New monetary policies from the Federal Reserve.
- Political changes e.g. a new president.
- Unemployment rates.
- Trade agreements (particularly important as the US is the largest economy in the world).
- Social security and Medicare policies or changes.
Strategies on Forex Trading EUR/USD
All types of trading carry a certain amount of risk. Forex trading can have more risk than other types of trading, simply because currency markets are volatile.
This is less of an issue with major pairs such as EUR/USD, because the two economies are fairly stable. Indeed, exotic pairs that focus on emerging nations are more volatile due to increased economic pressures.
However, forex markets rise and fall more rapidly than others. This is because, as we’ve already mentioned, they are affected by multiple factors. A political change, an economic issue, or a cultural shift can all impact the value of a currency and, in turn, the forex markets.
Therefore, it’s important to have a strategy when you’re trading EUR/USD.
When to Buy or Sell EUR/USD
It’s impossible to predict exactly when you should buy or sell EUR/USD. The market is always changing and there are multiple factors to consider before you execute a trade.
With this being the case, you need to consider the following variables before you trade EUR/USD:
- The currency price vs. the historical price.
- Upcoming political events such as elections.
- Economic policies such as fiscal policies and GDP.
- Political tensions such as wars and trade wars.
- Technical analysis, including price trends, technical indicators, support/resistance points.
How to Trade EUR/USD
You can trade EUR/USD by creating an account with one of our recommended forex brokers. Once you’ve done that, complete the following steps to buy and sell forex:
- Make a deposit.
- Download a forex trading platform such as MetaTrader 4.
- Search for EUR/USD inside the trading platform.
- Check the bid and the ask price. The bid is the price that traders are selling a currency at. The ask is the price traders can buy the currency at.
- Check the spread. This is the difference between the bid price and the ask price. This is the cost of doing a trade and where a broker makes a profit.
- Check the leverage. This is how much your investment will be multiplied by so that you can get full exposure to the market. Currencies are sold in lots and a lot is equal to 100,000 units. This is more than the average person can afford. Therefore, forex brokers will leverage your position i.e. multiply your stake in order to purchase lots.
- Decide whether you want to go long or short. Going long means you think the pair’s exchange rate will increase in value. Going short means you think the pair’s exchange rate will decrease in value.
How to Profit from EUR/USD
You’ll make a profit in forex when the value of the quote currency moves in a way you’ve predicted against the base currency. So, in the EUR/USD forex pair, EUR is the base currency and USD is the quote.
If the bid price goes above the ask price (i.e. the price you paid to enter the trade), the value of EUR has increased. If you’ve taken a long position on EUR/USD, then you’ll make a profit.
If the ask price is higher than the bid price you paid to enter the trade, the value of EUR has decreased. If you’ve taken a short position on EUR/USD, you’ll make a profit.
Closing Your Position: Taking a Profit and Cutting Losses
You close a position in order to lock up a profit or cut your losses. When you do this, it will be a matter of personal preference.
However, our top-rated forex brokers offer features known as stop loss limits and take profit limits. These features automatically end trades based on pre-set variables.
Alternatively, you can end trades manually via any forex trading platform. The great thing about trading EUR/USD is that there’s high liquidity in the market. That means there are always people wanting to buy and sell this currency pair.
So, when you make a trade, it’s completed almost instantly. This isn’t always the case with less popular currency pairs.
Choosing a Forex Broker
The final thing you need to take before you trade EUR/USD is the broker you’re going to use.
Each online forex site offers something unique in terms of software, spreads, leverage, and promotions.
Your job is to find the best forex broker for your needs. Fortunately, we’ve done all the hard work for you!
Our reviews outline everything a broker has to offer. From the trading platforms they provide and the fees you’ll pay to the availability of EUR/USD, our experts look at all the important bits.
Then, from there, you can use our ratings to compare sites and find the right online forex trading site for you.
The Risks of Trading EUR/USD
Nothing is guaranteed in the trading world. Even if you do all the necessary research, things may not go your way. With this in mind, here are some of the risks you need to consider before start trading EUR/USD:
Using leverage is great because it means you can invest a small amount and trade at a much larger position within the market. However, just as leverage can increase your potential returns, it can multiply your losses. Therefore, you need to ensure you’re not taking on too much.
You should never invest more than you can afford. Even if you believe EUR/USD is the best currency pair to trade, your stake should be a small percentage of your total bankroll.
Major events, whether they’re political or economic, can have an impact on forex markets. EUR/USD isn’t as susceptible to swings as some currency pairs but you need to accept that major events do pose a risk to your investment.
If there’s not enough activity in the market (i.e. liquidity), you might not be able to execute an order. This is a risk. For example, let’s say you’ve made a certain amount of profit and want to sell.
Low liquidity might mean there’s a delay in your closing the order. This could cause prices to change and your profit to decrease. EUR/USD is a high liquidity currency pair so this isn’t a major problem. However, it’s still something to consider.
Summary EUR/USD Online
When it comes to forex trading, EUR/USD is one of the best currency pairs to choose. Not only is it fairly stable and offers high liquidity, but there’s also a ton of information at your disposal.
Indeed, it’s easier to find out what’s going on in Europe and the US than Nigeria, simply because these regions receive more mainstream media coverage.
When you’ve got access to more information, there’s a better chance you’ll make the right moves. That is why, in our opinion, EUR/USD trading is a great option for beginners, intermediates, and professionals.