As the two largest currency markets in the world, the EUR/USD pairing offers excellent liquidity for forex traders of all types. While the pairing has seen periods of high volatility—most notably in 2010 and 2011, due in part to Greece’s economic crisis—the recent trading history for this pair has seen lower volatility and tight spreads.
This lack of volatility can be a challenge for day traders, since stable prices for the pair can limit a trader’s potential profit margin. The risk is lower, but so is the potential reward. Despite this overall stability, there are still opportunities to capitalize on EUR/USD volatility by paying attention to price movements and tracking potential market triggers.
Here’s a look at some possible day trading strategies to deploy with the EUR/USD currency pair.
Tracking Price Movements
Through chart analysis alone, there are several indicators that can represent a potential trading opportunity on EUR/USD. By paying close attention to these price movements, traders may be able to get in early on potential movements that may lead to profits from this pairing’s volatility.
Here’s a look at some of the top identifiers of a trading opportunity.
Opening Price Principle
In a liquid market, the opening price principle can be a reliable predictor of whether a market will open or close above the opening price on a given day. The application of this principle is a little trickier with forex than with other types of trading since forex markets never close, but many traders use 7:00 AM GMT as a de facto open to the day.
To apply the opening price principle, compare the price of a trading pair at 7:00 AM GMT to its price at 9:00 AM GMT. If the price is above the opening mark, the opening price principle says there’s a 65 percent chance the pair will close the day positive. If the 9:00 GMT price is below the opening mark, there’s a 65 percent chance the pair will close the day negative. Day traders can use this to forecast how the price might move over the course of the day, limiting losses or, conversely, remaining patient with a trade in hopes of reaping profits.
Repeating patterns in the EUR/USD pairing can indicate future movement that sets up for a trade. A fractal is one of the most basic patterns used in chart analysis, but it provides a reliable signal for traders to use when watching forex charts.
Fractals are comprised of at least five bars that reflect a turning point in trading price. In a bearish fractal, a middle bar will be higher than the two lower highs on each side, indicating that the price has topped out and is potentially headed for a downturn. A bullish fractal is inverted, with the middle bar lower than two bars on each side, setting up a potential upswing in trading value.
When evaluating charts for potential support and resistance levels, key numbers can be used to identify price points where orders can be placed. In addition to the double-zero and 50 retracement lines, where your trade has increased in value by 100 or 50 percent, respectively, traders also commonly use the 35 and 65 lines, as well as the more marginal 25 and 75 lines, to identify levels where profits should be banked—or to place stop orders that limit losses. Some other traders use the Fibonacci retracements of 23.6%, 38.2%, and 61.8%.
Average True Range
This metric is a calculation of the volatility of a trading pair over time—typically, over a 14-day window. While ATR doesn’t have value as a predictor of price movements, it can be used to identify windows where EUR/USD is exhibiting higher-than-normal volatility, making it an attractive prospect for day trading.
Other Market Considerations
Time of day is always an important factor to consider when trading forex, but time of year also has an important role in EUR/USD trading opportunities.
For example, British banking holidays can slow down trading activity for this pair, which can affect the reliability of chart patterns and other indicators. Similarly, traders should be mindful of holidays in both the United States and Europe that could result in fewer trades.
The risk in trading during slow periods isn’t necessarily because the liquidity and volatility of this pairing change—it’s that the normal trends used to analyze any forex pairing tend to be less accurate and reliable.
Similarly, day traders should keep a close eye on data release events in the United States and Europe that could have an effect on currency prices. In the United States, for example, US nonfarm payrolls day, which takes place on the first Friday of every month, can have a significant influence on the trading value of the EUR/USD pair. Similarly, when the European Central Bank announced in March 2019 that it would hold off on raising interest rates until 2020, the trading price for EUR/USD tanked:
Although the pairing’s value recovered over time, such a dramatic fall is something day traders should be mindful of when watching the economic calendar and plotting potential trades.
Due to the challenges of carving out a profit margin with any low-volatility pairing, trading EUR/USD can be a tricky endeavor. Traders should watch charts carefully and be mindful of peak trading windows to identify the best opportunities to trade with this currency pair.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.