How to trade the EUR/USD forex pair

What are currency pairs?

Forex trading is the act of exchanging one currency for another at a particular price. This process of exchange can only take place by putting currencies into pairs. These pairs compare the price of the base currency to the price of the quote currency.

When you look at a currency pair, the base is the first one listed (on the left of the slash), and the quote is the second currency listed (on the right of the slash).

So, for the EUR/USD pair, EUR is the base currency, and USD is the quote. Why do you need to know what the base and quote currencies are?

You need to know which currency is the base and which one the quote is because that’s how a value is assigned to the pair. The mechanics of a currency pair are: you’re looking at how much of the quote currency you need to buy one unit of the base currency. Let’s put this into an example.

Let’s say the price for EUR/USD is 1.3000. This means you can exchange 1 EUR for 1.3000 USD. This means you can exchange 1 EUR for 1.3000 USD— in other words, it takes 1.3000 USD to buy 1 EUR. Doing that allows us to say you need 1.3000 USD to buy 1 EUR.

To make this even easier to understand, let’s remove the decimals. If the EUR/USD price is 1.3000, we can multiply that by 100 and say you need 130 USD to buy 100 worth of EUR. Regardless of whether you choose to think about the price comparison in decimals or whole numbers is up to you. The point here is that the price you see refers to the amount of quote currency you need to buy one unit of the base currency.

The buy and sell price

Complicating things slightly, forex brokerages display two prices: the Buy Price and the Sell Price. The Buy Price is the rate you’ll get if you want to buy the currency pair i.e. go long. The Sell Price is the rate you’ll get if you want to sell the currency pair i.e. go short.

There will be a small difference in the value of these two prices. This difference is known as the “Spread”. . Depending on the account and pricing model, trading costs may be reflected in the spread and/or commissions/fees. Spreads are measured in pips. Pip stands for Point in Percentage, and it is typically the standardised smallest price move in a currency pair (often the fourth decimal place for many major pairs).

As a trader, you need to decide whether the currency pair’s price will increase or decrease. Based on that decision, you will either take a Sell position or a Buy position.

Buy Position: If you think the value of the base currency will increase compared to the quote currency, you’d take a Buy position. So, for EUR/USD, taking a Buy position means you believe the price of EUR will strengthen against USD (or USD will weaken against EUR). Expressed in another way, you believe EUR will be bullish against the bearish USD.

Sell Position: If you think the value of the base currency will decrease compared to the quote currency, you’d take a Sell position. So, for EUR/USD, taking a Sell position means you believe the price of EUR will weaken against USD (or USD will strengthen against EUR). Expressed in another way, you believe EUR will be bearish against the bullish USD.

Major currency pairs

There are major currency pairs, such as EUR/USD, minor currency pairs, and exotic pairs. Forex is one of the most liquid market in the world, which means the major pairs attract a lot of trading activity. As such, there are plenty of opportunities to buy or sell.Some of the major ones are: 

• EUR/USD 
• USD/JPY 
• GBP/USD 
• USD/CHF 
• AUD/USD 
• USD/CAD

Why does the EUR/USD forex pair matter? 

The EUR/USD is the most traded of all forex pairs in the world. That’s largely because it is the two of the biggest western economies trading against one another. One of the key differentiators between the value of the Euro and the US dollar is their respective interest rates. The rates set by the European Central Bank (ECB) and the Federal Reserve can play an influential role. Meanwhile, any issues affecting EU nations, such as the past debt crises in Italy and Greece, did much to destabilise and weaken the EUR/USD, with the dollar strengthening fast against the Euro.

The risks of trading EUR/USD 

Trading any type of financial instrument carries a certain amount of risk. Forex can be volatile. Measuring price movements in pips means that even the smallest change can have an impact on your trade. This is something novices don’t always understand because it’s easy to mistake currency exchange rates with what happens in the forex market. 

When you go to a bureau de change and look at the EUR/USD exchange rate, you’ll typically only see two numbers after the decimal point because that’s how we look at monetary values. So, on one day, you might be able to get 1.35 US for 1 EUR. The next day you might be able to get 1.36 USD for EUR. This doesn’t seem like a big jump and, in many ways, it’s not. 

In forex, things are different because more numbers after the decimal point are taken into account. It’s these micro-movements that make forex trading a volatile activity. Therefore, when you’re assessing the risks of EUR/USD, you need to think about how significantly and frequently the price will change. 

Don’t forget about leverage

Another risk you need to consider when trading EUR/USD is leverage. Forex pairs are traded in lots and a standard lot is worth 100,000 units of currency. Depending on the broker and product, you may be able to trade smaller sizes than a standard lot, and trading on margin/leverage is optional but common. This means you put up a small amount of the total cost and the broker leverages up your investment. The difference between your investment and what the broker lends you is the margin.

You can choose the amount of leverage you take. The less you take, the more money you have to stake. However, in most cases, you’ll trade EUR/USD with a margin. However, leverage will magnify your profits and losses because your position is based on the full value of your trade and not just the money you committed. Therefore, when you lose money on a leveraged trade, you can lose it faster.

Stop-loss orders can help manage risk. This tool will automatically close a position once a certain loss limit is reached. That makes it an important tool to use when you’re trading EUR/USD. It won’t stop you from losing money on a bad trade, but it can limit your losses.

EUR/USD is highly liquid, and outcomes are uncertain and there are always risks. However, with the right analysis and trading conditions, it’s a currency pair that presents interesting opportunities for traders.