Currency Trading Tips: Trading the EUR/USD 2

A Brief Guide to Trading the EUR/USD – Chapter 2: The EUR/USD currency pair

The Euro, nicknamed the Fiber, is the official currency of the European Union (EU). This union actually comprises of 15 European countries and their monetary policies are controlled by the European Central Bank (ECB). Thus the Euro is the legal tender that is used by the entire population 320 million people in these 15 countries. This means that the Euro has the highest aggregate value of cash that is in circulation, surpassing even that of the US dollar. The US dollar, the “Buck” or “Greenback” is the global reserves currency used by nations all over the world as the medium of payment for international trade. Here, the sign “EUR/USD” means that the Euro is crossed or paired with the US dollar. As mentioned earlier, currencies are paired off because any Forex transaction will ALWAYS involve buying one currency and selling another currency at the SAME time.




A Brief Guide to Trading the EUR/USD - Chapter 2: The EUR/USD currency pair

Below is an illustrated example of how the exchange rate of the EUR/USD is denoted:

EUR/USD = 1.4084

The currency that is listed on the left side is known as the “Base” currency. In our example, this is the Euro. The currency that is listed of the right side is known as the Counter/Quote currency. In our example, it is the US dollar.

The exchange rate denotes how much we have to pay for one unit of the base currency (EUR) in terms of the quote currency (USD). Thus, our example shows an exchange rate of 1.4084. This means one unit of Euro will cost 1.4084 of US dollar.

Likewise, the exchange rate will also denote how much we will get in terms of the quote currency when we decided to sell one unit of Euro. Thus with reference to our illustrated exchange rate, we will receive 1.4084 of US Dollars when we sell one Euro.



The diagram above is a snapshot of the figures for the currency pair EUR/USD at June 10 2009.
“Last” denotes the current value of the exchange rate.
“Change” denotes the percentage change of the value of the exchange rate from the close of market the previous day at 5pm ET. In our example, it has increased by 0.114%.
“Low” indicates the lowest value of the exchange rate since the close of the market the previous day.
“High” indicates the highest value that is reached by the exchange rate since the close of the market the previous day.
The arrow indicates the direction of the exchange rate since the previous day, that is, an upward trend.





The chart above indicates the fluctuation of the EUR/USD currency pair throughout the trading day of June 10. The X- axis indicates the time scale while the Y- axis of the chart indicates the exchange rate.

If your expectation is that theUSeconomy is going to be weaker still, this would mean that the US dollar will drop in value. As such, you will take a long position in the EUR/USD currency pair. You are buying the Euro in anticipation that the Euro will increase in value against the US dollar.

Conversely, if you are of the opinion that theUSeconomy is going strong and thus the dollar will rise in value, you will hold short position in the EUR/USD currency pair. Here, you are selling Euros in anticipation that they will fall against the US dollar.

Although Forex traders are unable to advise you on what currency pairs to invest in, they will be able to provide you with all the tools that you need to help you analyze the market trends.

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