We’ve looked at the major trading
attributes of EUR/USD and now its time to look at how those elements translate
into real-life trading tactics. After all, that’s where the real money is made
and lost.
Deciding
whether it’s a U.S. dollar move or a euro move
As discussed in my previous post, I mention that EUR/USD routinely acts as the primary vehicle for forex markets
to express their view on the USD. At the same time, I also indicated that
EUR/USD will also react to euro-centric news and data. So for traders approaching
EUR/USD on any given day, it helps to understand whether the driving force at
work is dollar-based or euro-based. Are they bearish on the USD, or are they
bullish on the EUR? Or is it some combination of the two?
Having a sense of which currency
is driving EUR/USD at any given moment is important so you can better adapt to
incoming data and news. If it’s a EUR-based move higher, for instance, and
surprisingly positive USD news or data is released later in the day, guess
what? We’ve got countertrend information hitting the market, which could spark
a reversal lower in EUR/USD (in favour of the dollar). By the same token, if
that U.S. data comes out weaker than expected, it’s likely to spur further
EUR/USD gains, because EUR-buying interest is now combined with USD-selling
interest.
Being
patient in EUR/USD
Also in my previous post, we explore why EUR/USD can spend hours trading in relatively narrow ranges or
testing technical levels. The key in such markets is to remain patient based on
your directional view and your technical analysis. You should be able to
identify short-term support that keeps an upside test alive or resistance that
keeps a down-move going. If those levels fail, the move is ‘stalling at the minimum
and may even be reversing.
Taking
advantage of backing and filling
Because EUR/USD tends to retrace
more of its short-term movements, you can usually enter a position in your
desired direction by leaving an order to buy or sell at slightly better rates
than current market prices may allow. If the post-08:30 ET U.S. data price
action sees EUR/USD move lower, and you think getting short is the way to go,
you can leave an offer slightly (roughly 5 to 10 pips) above the current market
level and use it to get short, instead of reaching out and hitting the bid on a
downtick.
If your order is executed, you’ve
got your desired position at a better rate than if you went to market, and
you’re probably in a better position rhythm-wise with the market (having sold
on an up-tick). Alternatively, you can take advantage of routine backing and
filling by dealing at the market by selling on up-ticks and buying on
down-ticks.
Allowing
for a margin of error on technical levels
When it comes to determining
whether EUR/USP has broken a technical level, we like to use a 10- to l5-pip
margin of error. Shorter-term traders may want to use a smaller margin of
error.) Some very short-term traders and technical purist like to pinpoint an
exact price level as support or resistance. If the market trades above or below
their level, they’ll call it a break and that’s that. But the spot forex market
rarely trades with such respect for technical levels to make such a clear and
pinpointed distinction. And given the amount of interest in EUR/USD, it’s
especially prone to hazy technical lines in the sand.
The key point to take away from
this is that all sorts of interest emerge around technical levels, and it’s
still going through the market even though the pinpointed level might have been
breached. And this is where our margin of error comes in. Again, it’s not a
hard and fast rule, but generally speaking, EUR/USD will have chewed through
most of the market interest around a technical level within about 10 to 15
points beyond the level.
