What should I know before investing in the EUR/USD?
To better understand movements in the EUR/USD currency exchange rate it is necessary to understand what this pair represents.
The EUR/USD, or Euro Dollar corresponds to the currency exchange rate for the Euro in American Dollars, to put it simply this pair expresses the value of one Euro in American Dollars. This currency pair can therefore be used in real time commercial trades relating to the economy, in foreign exchange transactions for international travel or as a financial tool with the aim of speculating on the Forex market.
It should be noted that the EUR/USD is actually, and has been for a long time, the most traded currency pair on the foreign exchange market. It is in fact highly popular with investors for various easily understandable reasons. We also know that the Euro Dollar currency pair is highly fluid and that the Euro and the dollar are the most used currencies in international trade. The volatility is however also highly significant and we therefore recommend prudence when this currency pair is used as a financial asset for trading.
Movements in the EUR/USD currency exchange rate are freely made according to the floating currencies system. These movements therefore take place according to the supply and demand on the interbank markets. It is the two central banks that are responsible for these currencies, the European Central Bank or ECB, for the Euro and the Fed, or American Federal Reserve for the dollar that are the only entities with the right to intervene in an exceptional manner to influence the movements of this rate.
The Euro Dollar currency pair is also the most spot traded currency pair worldwide as it represents nearly 33% of the dollar exchange transactions.
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Where and how can I invest in the EUR/USD?
There are several platforms where you can invest in the EUR/USD:
1. Forex brokers:
- Advantages: Wide choice of platforms and instruments, competitive spreads, access to leverage.
- Disadvantages: High risk, need for trading knowledge, transaction fees.
2. CFD accounts:
- Advantages: Access to a wide range of assets, including currencies, equities and commodities.
- Disadvantages: High risk, overnight financing fees.
3. Currency futures:
- Advantages: Standardised contracts for better risk management.
- Disadvantages: Requires a margin trading account, high risk.
The technical analysis of the EUR/USD:
One of the types of analyses used by stock market investors on the Forex for trading in the Euro Dollar rate is the technical analysis which we shall examine here. In fact, this analysis uses the movements observed on the charts to identify the specific configurations that will indicate the formation, acceleration or reversal of a trend.
More precisely, a technical analysis of the EUR/USD currency pair uses various technical indicators. These are generally trend indicators but also volatility and fluidity indicators. Among the most commonly used technical indicators we note the following:
- The Fibonacci lines
- The pivot points
- The support and resistance levels
- The MACD indicator
- The moving averages
- The Bollinger Bands
Although it is possible to choose one or another of these indicators it is preferable to use several simultaneously to obtain confirmation of the signals obtained. However it is important to remember here that a technical analysis is not a guarantee and does not provide rising or falling indicators that are 100% reliable. In fact, this analysis is none other than a mathematical and statistical analysis that does not take into account the psychology of the markets and other exterior factors that are necessary to find and study through the completion of a fundamental analysis that we examine in detail later on.
Another important factor to take into account for your technical analysis of the EUR/USD currency exchange rate relates to the time period covered by the chart. In fact, the time units displayed on the Euro/Dollar chart can normally be personalised and vary between one minute and one year. Depending on the strategy adopted and its length, it may be necessary to adapt this display with the aim of studying the exchange rate movements over the short, medium or long term for this currency pair.
Last but not least it is also important to pay careful attention to the type of chart you use. Generally the EUR/USD charts available from the online brokers integrate the functions necessary for a technical analysis but this is not always the case. It is therefore important to check that the chart you choose enables the display of several indicators simultaneously and in real time and the personalisation of the type of display (curves, lines, Japanese candlesticks…) as well as the choice of timeline with the personalisation of time periods.
The calculations necessary to obtain the technical indicators do not need to be completed by you as these are generally completed automatically by software. You do however need to learn how to interpret these indicators correctly to be able to obtain pertinent trading signals.
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Fundamental analysis of the EUR/USD:
Now that we have examined the technical analysis of the EUR/USD exchange rate we shall now look at another type of analysis that is essential for this currency pair. This is of course the fundamental analysis which, as we mentioned earlier, consists above all of an analysis of the exterior factors that could influence the supply and demand and therefore the exchange rate of this currency pair.
To understand this analysis it is important to remember that the Euro Dollar currency pair represents the currency exchange rate between the premier global economic power, the United States, and the Euro Zone which again is a strong economic power. As you no doubt understand, any economic events relating to these two currency zones will have a direct influence on the exchange rate of the EUR/USD currency pair on the foreign exchange market. However other indicators can also impact this rate. Here is a list of the major American and European publications and announcements that you should monitor in the course of this analysis.
- First of all, you need to pay close attention to the interest rates in these two economies, i.e. the rates at which banks can borrow to finance businesses and individuals. These interest rates are of course determined by the central banks, the Fed and the ECB.
- More generally, you should keep a close eye on the press conferences and meetings of these major central banks, the dates of which are published in the economic calendar. These meetings and conferences very often have an impact on the price of these two currencies.
- Among the most influential economic indicators for these two zones are non-farm payrolls, which reflect the state of employment and therefore activity in each zone or country.
- Of course, the unemployment rate and wage trends are also interesting data to study, as they influence purchasing power, consumption and therefore company sales.
- The CPI inflation rate should also be monitored, as this corresponds to the consumer price index and is closely correlated in both directions with the value of the euro or the dollar.
- Other economic figures and results to keep an eye on include GDP growth rates, retail sales, durable goods orders, industrial orders, business sentiment and consumer confidence. Once again, these publications are announced in advance in the economic calendar.
- Of course, political and geopolitical events affecting these two world economic powers are also taken into account in these fundamental analyses, since a military or trade war can have a significant impact on an economy and therefore on its currency.
Of course, a fundamental analysis, as with the technical analysis, should not be used alone but rather as an accompaniment to the other analysis or even other analytical methods that we shall not examine at this time.
How to trade the Euro Dollar online?
Trading the Euro Dollar (EUR/USD) is one of the most popular instruments in the foreign exchange market, also known as Forex. This is largely due to the volatility of this instrument, which offers many opportunities for traders. Here is a guide on how to trade the Euro Dollar online.
- First of all, it is important to choose a reliable online broker to trade with. It is important to choose a trading platform with a good reputation, low transaction fees and advanced trading tools. Once you have chosen your trading platform, you will need to open an online trading account.
- After opening your account, you will need to deposit funds in order to start trading. It is important to note that currency trading is a high risk activity, and it is recommended that you do not invest more than you can afford to lose.
- Once you have deposited funds into your trading account, you can start trading the Euro Dollar online. Traders can buy or sell the Euro Dollar depending on their analysis of the market. For example, if a trader believes that the Euro will strengthen against the US dollar, he can buy Euro Dollar. On the other hand, if a trader believes that the Euro will weaken against the US Dollar, he can sell Euro Dollar.
Traders can use various technical analysis tools to make trading decisions. Technical indicators such as moving averages, Bollinger Bands and the Relative Strength Index (RSI) can help identify market trends and entry and exit points.
In addition, traders can use fundamental analysis tools to make trading decisions. Fundamental analysis involves examining economic and political factors that may affect the foreign exchange market, such as interest rates, government policies and geopolitical events.
Finally, it is important to note that online Euro Dollar trading can be done using different types of orders. Traders can use market orders to buy or sell immediately at the current market price, or use limit orders to buy or sell at a specific price.
In conclusion, trading the Euro Dollar online can offer many possibilities for traders. However, it is important to choose a reliable trading platform, deposit funds responsibly and use technical and fundamental analysis tools to make informed trading decisions. It is also important to remember that currency trading is a high-risk activity and it is recommended that you do not invest more than you can afford to lose.
EUR/USD trading example
You want to trade the EUR/USD currency pair intraday. You note that the current rate is 1.1050 (1 EUR is worth 1.1050 USD).
Analysis:
- You have recently read press reports suggesting that economic data from the eurozone may be weaker than expected.
- On your trading chart, you notice that the EUR/USD has formed a bearish flag, indicating a possible downtrend.
Trading strategy:
- Short trade: Based on your analysis, you decide to place a short trade (sell EUR and buy USD) in the hope that the EUR will weaken against the USD.
- Entry point: You set your entry point at 1.1050, the current market price.
- Stop-loss: To limit your potential losses, you place a stop-loss order at 1.1080 (which means that the trade will be automatically closed if the EUR/USD price reaches 1.1080).
- Take-profit: You place a take-profit order at 1.1000 (which means that the trade will be automatically closed if the EUR/USD price falls to 1.1000, guaranteeing your profit).
Trade execution:
- You place your trade short at 1.1050, selling EUR 10,000 and receiving USD 11,050 (at the current exchange rate).
Possible outcomes:
- Favourable outcome: If your analysis is correct, the EUR/USD price weakens and you see it fall to 1.1000. Your take-profit order is triggered, automatically closing the trade. You would then buy back EUR 10,000 at the new price of 1.1000, spending only USD 11,000. This results in a profit of USD 50 (USD 11,050 initially received - USD 11,000 spent to buy back EUR).
- Unfavourable outcome: If your analysis is wrong and the EUR/USD price rises instead, the price could reach your stop-loss at 1.1080. This order would be triggered automatically, limiting your loss to USD 30 (USD 1.1080 - USD 1.1050 entry price) per EUR 10,000 traded.