The EURAUD currency pair reflects the strength of the Euro versus the Australian dollar, and this can be thought of as the Euro versus the strength of gold, because the Australian dollar is strongly correlated to the price of gold, and that’s because Australia is a big gold exporter. Moreover, in terms of risk appetite analysis, Euro is a risk market whereas gold is a safe haven market. There are times when the correlation between gold and Australian dollar goes away, or it is totally reversed, but for most of the time a positive correlation does exist.
EURAUD can be analyzed both in terms of the Euro and in terms of gold price, in an effort to gain greater insight into what is fuelling a particular trend.
In terms of Carry Trade potential, EURAUD offers one of the highest interest rate differentials and Carry Trade strategists take it into account, for using it in their long term trades, which are of course hedged against excessive directional risk.
How to Trade EURAUD
EURAUD is a volatile and seemingly difficult market to trade, at least for perfectionist traders seeking seamless entries and exits. Volatility means there is more confusion than in other pairs, and also more opportunity, as long as one knows how to embrace the risk.
EURAUD daily chart – this currency pair works well with the Parabolic SAR indicator, and in many different ways, however you should first use this indicator as a guide for placing stops and anticipating reversals. Simple moving averages between a period of 10 and 30 days work for this currency pair, and can serve as a momentum indicator.
Swing trading theory does not work well with this pair, this could be for all kinds of reasons and volatility related factors, but swing trading theory would yield too many false signals on the above daily chart. Traders who want to use simple moving averages and swing trading theory as a basic strategy for this pair, should refine their analysis through probability assessment, either through applying notional stops in the time domain, or through the use of binary option pricing, both of these concepts can help identify false moves and doomed trades on the daily and on the one hour chart.
In terms of volatility, this currency pair is quite noisy and volatile, which means that a tight stop strategy will not work, only a big stop strategy will work in this case, and only in conjunction with probability analysis. Volatile and noisy markets have their own hidden benefits, as they are better suited for shorter term trading, and for trading where the time frame is variable and flexible.
All in all EURAUD is a weird pair, and bears similarities to the gold market, where volatility is often excessive. This means that you cannot use an ECN broker’s variable spreads as an indicator on EURAUD, as it would be very hard to infer any patterns at all, since the market is volatile most of the time, in most time frames.
To enhance your trading and help evaluate signals on EURAUD you can simply stick to probability analysis, and binary option pricing, ideally binary options having 2-3 times longer expiry times than your actual intended spot forex trade. Especially on time frames ranging from few hours to 3 days, binary option pricing can reveal what the probability is for a given market move.
Finally, EURAUD, because of its volatility and hidden potential, is better suited to small size, multi trade strategies, where the trader will make for example 3 small trades rather than a large one, and at a different entry price. Because of the higher volatility involved it actually makes sense to add to losing trades, as long as you have the daily trend on your side.