If you are a new trader still going through the process of learning how to trade in the Forex market, you must pay some attention to the best and worst currency pairs in terms of volatility and profitability. Whenever you research Forex and the best currency pairs, there are six to seven currency pairs that will always come up. These currency pairs are the most popular ones in the Forex market. Among other things, they are also the safest currencies to invest your money in because of the stability in their rates.
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Some of the most well-known currency pairs you will often come across include USD/EUR, USD/GBP, USD/JPY, USD/AUD, USD/CAD, etc. Now, they are popular but that does not mean they are the best currency pairs for you to trade. Cross currency pairs also exist and their high volatility makes them interesting components of the Forex market as well. However, the focus will be on one of the most popular currency pair in the Forex market i.e. USD/EUR. What you will learn today is why huge trading volumes of USD/EUR have made this currency pair less profitable.
USD to EUR – The Effects of Huge Trading Volumes
If you are new to Forex, you will soon find out that USD/EUR is the most popular currency pair that people are trading all over the world. This results in increasing the volume of trading immensely for the two currencies. There are many reasons why people end up trading this particular currency the most. First, there is no other currency pair on which they can find as much data as they can on this pair. You can sign up with any online broker, visit any currency exchange website etc. you will see that there is ample information available for you to learn about the currency pair and its performance in the Forex market.
So, when there is enough information available on a currency pair, it ends up being a safe pair. People don’t have a hard time speculating and predicting where the price will move in the coming days. You could say that this particular factor also makes this currency pair a perfect way for newcomers to start. Since they don’t want to end up with huge losses, they can go with the USD/EUR pair and spend some time learning in the real environment without putting too much at stake.
Furthermore, the two currencies belong to the most stable regions in the world in terms of economy, politics, and other aspects that affect the value of currency. Since both these regions are performing stably, you don’t often notice any unusual fluctuations in their values. These factors along with many other make USD/EUR the most popular, stable, and generally less volatile currency pair in the world. Is that a good thing or a bad thing? That depends on what your specific goals are as a trader.
The first thing you need to know is that the security of trading associated with the pair causes people to trade it in huge volumes all around the world. Such high volume of trading makes this currency pair boring for many traders because they can’t do much with it unless they trade extraordinarily huge volumes.
One of the factors that affect the price of currencies in the Forex market is people holding on to a currency for a long time. In the case of USD/EUR, that does not really happen a lot. That’s because you can’t expect a lot of gain while holding on to any of these currencies for a long time. They will keep moving stably on the charts and you don’t want to wait for months for a profit that does seems very meager. If you look closely at the fluctuation in value in the past year i.e. from 2017 to 2018, you could say that the chart has shown some unusual movement. However, those unusual movements are still within the 0.8xxxx range.
What that means is that you have to trade a huge lot to benefit significantly from the price movements. For new traders who don’t have a lot of money in their accounts, there is not much attraction in investing their money in this currency pair for that reason.
The huge volume of trading also means that a currency has high liquidity in the market. You hold on to the currency and can get rid of it anytime you want because of a lot of trade going on at any given moment. With other small currencies, traders would often want to hold on to the US dollar unless the other currency falls significantly in value. At that time, they can sell their dollars for the other currency and can benefit from the exchange rates. In fact, lot of big traders and institutions can affect the price of a currency by reducing their trade.
When they do not trade the currency, they create a demand and supply gap in the market. By doing this, they can impact the value of small currency and unique and cross currency pairs. On the other hand, they don’t have this power over USD/EUR. It does not matter how many dollars or Euros they hang on to and for how long, the market remains liquid and there is negligible to no difference in the exchange rates of both these currencies.
That’s why, trading this particular currency pair is not the most profitable trade in the Forex market. First, when you are holding on to any of these currencies, none of these will go too high or too low. Even if fluctuation does occur, the two currencies adjust quickly and are back to normal in no time. Political stability is also not a big problem in the two countries. You can take the example of the US where there was a lot of backlash after Donald Trump became the president. Despite all the hate and opposition he received from the Americans, the dollar is still outperforming most other currencies in the world today.
Whether you are looking for long-term benefits or short-term benefits, the profitability that you want to expect from your Forex trades is not there in trading USD/EUR. First up, they can both move in any direction and the movements will always be very small. When you buy lots of units of one of these currencies and keep them safe for months, you are locking your money. Of course, the money you have in one trade cannot go into another trade. However, when your trade is executed, the reward is not that fulfilling.
When it comes to short-term trading, which you can also call day trading here. In day trading, you want to benefit from your trades within the same day. The idea is to benefit from small profits and build up a portfolio steadily. However, with this currency pair, the profits are so small that day trading can seem useless at times. For that reason, you are highly recommended to go for currency pairs that show a lot of volatility if you are interested in making big profits in a short span of time.
What You Should Do to be More Profitable?
Of course, if trading USD/EUR is not giving you the returns you expect, you have to find alternatives to be profitable. Here are some things that you can do to execute more profitable trades than trading USD/EUR currency pair.
Trade Other Currency Pairs
There are many currency pairs that you can trade other than the most famous ones on the market. The big ones hardly show any signs of unprecedented movements. Even if there are unusual fluctuations in their prices, they either don’t last for a long time or are so small that your profits aren’t satisfactory. You can research the most volatile currency pairs to know where you can make the most profit. Some of the most volatile currency pairs in the world are GBP/AUD, EUR/NZD, GBP/JPY, EUR/CAD, etc. Do not just assume that these currency pairs will always be volatile. You should do your research and find out the most recent analytics to know which one you should be trading.
Use the Leverage Option
When you are looking for the right broker to start your trading career with, you want to pay attention to the leverage they are offering you. Leverage can be a great tool to increase your profits. Leverage is like a contribution that your broker is willing to make with you so you can execute big trades. So, if there is a trade that will require you to put in $10,000 but you only have $1000 in your account, a 1:10 or other leverage option can help you control that trade with ease. In this way, you are able to trade an amount that is much bigger than the funds you have in your account.
However, you also have to understand the risks associated with using this option. It is not as though a leverage is only there to make your trades profitable. In fact, things can go both ways. What that means is that if you end up incurring a loss as a result of your trade, your leverage is going to amplify that loss as well. For that reason, you have to be very careful with the leverage option. Use it when you are fully sure of your success while executing a trade.
Follow in the Footsteps of the Pros
It is the beauty of today’s technology that you can benefit not only from your own trading skills but the skills of the professional traders as well. You might have to do some research to find this option. So, a broker might have a copy or social trading option on its platform. With the help of that option, you are able to copy the trades of some professional trader on the market. Of course, the person you can trust the most is someone who has spent years trading in the Forex market. The broker’s platform will let you see their trades and copy them with a single click.
You can even define the rules of your trades beforehand. Once you have defined the rules, your platform will match those rules with the strategy of some professional trader. The software can automatically execute the trade as soon as it matches the requirements that you have defined.
Go for the New Markets
When it comes to trading, one of the best ways to go about doing that is CFD trading. In this type of trading, you don’t own any financial instrument. Instead you have a contract of owning the financial asset. CFDs allow you to trade any financial asset you want without the burden of ownership on your shoulders. With that in mind, you can go for the most volatile trades. You do not necessarily have to stick to the conventional currency pairs. Instead, you can go for some emerging markets like the cryptocurrencies.
Yes, you can trade cryptocurrencies without owning them, thanks to CFDs. These are also currencies, but they are just digital. The volatility of the cryptocurrency is not secret. In addition to that, the world knows that cryptocurrencies are the currencies of the future. You cannot ignore them today if you are looking forward to becoming a trader. Make sure you familiarize yourself with cryptocurrency and other financial markets to benefit from them if you don’t want to trade USD/EUR.
One must not assume from the lack of volatility of USD/EUR that they should never trade this currency pair. In fact, traders are advised to take their decisions based on their preferences. Every trader is different and prefers a different type of strategy. Some traders want to make huge profits in less time whereas others focus more on minimizing their risks while executing their trades. If you want big profits, you should go for other currency pairs than USD/EUR to benefit from their high volatility. However, if your strategy is to benefit from small profits over the course of a long time span, trading USD/EUR currency pair is definitely the best thing for you to do.
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