EURUSD is a very popular currency pair among forex traders, and it is a market that is widely watched by investors and traders in the long term. It is 1/3 the size of the entire forex market, by trading volume, and it is very popular among day traders as it sets the tone for direction, for few more currency pairs, such as GBPUSD. EURUSD is directly inversely related to the US dollar, and just like all markets that are priced in USD, there is an element of uncertainty and risk, relating to the US dollar itself.
The US dollar itself is very hard to predict, because it can defy economics and analysts’ opinions at any time. The US dollar can defy all technical and fundamental analysis at any given moment, where geopolitics and international diplomacy become more relevant than anything else. Economic analysts are too focused on economic theories, figures such as trade balance and inflation, and yet the US dollar can rise out of the blue, when it is least expected and result in a surprise big move in EURUSD. These moves in the US dollar are caused by cycles in the markets and can be triggered by geopolitical events, and the perceived military power of the United States.
EURUSD is seen as a risk market, it tends to go up when investors feel good about taking risks, and inversely the US dollar goes down. But when investors become risk averse the UD dollar goes up and EURUSD goes down. In any case, the US dollar always maintains a hidden strength because of the strength of the US military, and when geopolitics is relevant the US dollar can rise just like that against the other side, that is the European union in the case of EURUSD.
How to Trade EUR/USD
EURUSD can be traded in many ways, however there are many misleading, overhyped popular indicators out there that simply don’t work. Especially indicators such as Fibonacci numbers, moving averages, and some types of support and resistance. These result in false trading signals all the time. Wise traders trade EURUSD using swing trading theory, LSS pivot numbers and other more reliable methods. EURUSD can also be used in scalping strategies during the quiet, less volatile Asian trading session, and this can actually be more profitable than trading during the London or New York trading session.
EURUSD daily chart with the 10 day simple moving average and Parabolic SAR indicators. As you can see the moving average is way too misleading, the market can breach it in any way, giving the impression that the trend is about to change, only to resume its previous trend once more. Parabolic SAR is also a crude indicator, but it can be used to place stop loss orders more wisely, as opposed to using fixed size stop loss orders.
In terms of technical analysis, only 4 hour charts (or longer term), should be used to look for technical signals. 1 hour and 30 minute charts can be used for gauging momentum only. And above all, the daily chart is the one single time frame where all market opinions are consolidated. One day’s trading action, no matter how big, cannot change the underlying daily trend.
While there are advanced peculiar methods for evaluating trading signals and determining if a signal is false or not, most of these methods are secret and very hard to use anyway. There is one method though which is somewhat easier to visualize and use, without doing much numerical processing. This method relies on a simple belief based on probability theory and has been used by traders for decades now. This method attempts to identify ‘stop loss’ levels in the time domain. These are imaginary time limits, in the case of EURUSD, on its daily chart, it is believed that there’s such a limit at around 3 trading days.
Simply put, this means that when the trader gets a signal on the EURUSD daily chart, they will have to count 3 trading days, if market price fails to make impressive progress in the direction of the wanted trade within this period of time, then the probability of that trade ever becoming successful, diminishes to zero. And the trader has to close that trade regardless of open P/L, and even possibly look to open an opposite trade. This theory remains vague and poorly defined, and there are doubts as to whether these time limits really exist. And yet in actual trading tests on EURUSD, limiting the waiting time to 3 days seems to work much more often than not, and many losing trades can be avoided long before the price stop loss orders are triggered.
This concept simply tells you that if it takes too long for an event to happen, then probably it never will, and even Binary Option pricing is based on this concept. It is however very useful in evaluating open trades on EURUSD and many other markets. And this makes one wonder whether binary Option pricing can be used to evaluate probabilities of open trades on the spot forex market. Traders could for example trade EURUSD, on their preferred time frame, and at the same time open a binary Option trade, in a demo account, which reflects their expected EURUSD spot trade. If the said binary Option becomes worthless or drops below a certain threshold level, it will signal that the open spot EURUSD trade will soon turn into a loser, and the trader can close it much earlier, avoiding all losses. In other cases, this notion of probability can indicate in which direction EURUSD is likely to go, and how fast, resulting in a more solid trade signal.
All in all, probability studies are likely to work well in liquid markets only, such as EURUSD is, and only over specific time frames. For longer term time frames, such as 10 days binary Option pricing can be completely wrong, and cannot be relied upon. In small time frames however it can work well, just like the 3 day limit has been proven to work on the daily chart, and just like a 20 -25 minute limit has been proven to exist in day trading of various markets.