EURUSD Day Trades – Front-Running Breakouts

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EURUSD Day Trades – Front-Running Breakouts

January 6 was an interesting day, as it directly related to several articles written recently.

As the US session began today the EURUSD was moving within a triangle pattern, following a trending move down. The expectation based on the trend was that the price would break lower out of the triangle. Therefore, using the strategy discussed in How to “Front-Run” Triangle Breakouts, two trades were take near the top of the triangle in order to get advantageous pricing for the breakout lower. On both attempts lower the price failed to follow-through and the trades were exited with a small profit.

Even though the expectation that the price would drop, it ultimately has to do it. If it doesn’t, get out. By front-running the triangle breakout, two profitable trades were made. Had only the actual breakout been traded, it would have resulted in a loss, since the price didn’t end up going lower. It had a false breakout and then proceeded higher.

Figure 1 shows the first two trades. Arrows mark the direction of the trade and approximate time; the little horizontal lines represent the entry price and exit price.

Figure 1. Front-Running a Triangle Breakout

After the failed breakout the price proceeded to rally quite aggressively. While I wanted to get in on the rally, the price didn’t pull back quite far enough to reach my order. Figure 2 shows this.

Figure 2. No Fill

The price pops higher, pauses then pops higher again. It then pulls back to the same low as the prior pause (rectangle). I placed a buy order near those lows (in the rectangle), because it was now apparent that this was likely just a consolidation before another move higher. My order went unfilled and the price moved up. On some days I would just market buy once I saw I was right, but since it wasn’t a very volatile day chasing the price would have likely eaten up too much profit.

As the price action continued to unfold, another familiar pattern emerged–the Head and Shoulders Continuation Pattern. While the head and shoulders is often viewed as a reversal pattern, it can also signal a continuation. Notice the strong rally heading into the H&S pattern, and also that the pattern isn’t very big. In other words, it’s likely just a complex consolidation before the price proceeds higher.

Figure 3. Head and Shoulders Continuation Pattern Trade (front-run)

Even though expectation is higher, a high probability entry is still needed. For me, that didn’t occur until the small rectangle marked “Entry.” With the price making higher lows, and the overall expectation higher, the price is getting wound like a spring. Once is starts moving back up after making another higher low the odds are very much in our favor. A Fibonacci Extension tool was used for the exit. Good locations for the stop were just below the higher lows, or just below the horizontal black line which marks the overall bottom of the pattern.

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Paying attention to overall price structure and managing expectations is far more important than any trade signal. I try to “front-run” and get great price with very little risk by thinking about what I expect the market to do, and then figuring out the best entry strategy. Usually that is not right at a breakout point. If the expectation doesn’t work out, and the price doesn’t follow-through, I get out. With the advantageous pricing the trade has good chance of being profitable, or only a small loss, anyway. Pay attention to strong price moves, and in which direction they are moving. This will help manage expectations even when the price seems to be moving in rather complex formations.

Trading EUR/USD

Representing the world’s two largest economies, it is perhaps little surprise to learn the EUR/USD is the most popular traded currency pair in the world. But whilst rich volatility and volume attract day traders from all over the world, generating substantial profits is no straightforward feat. This page will break down the history of the EUR/USD, why to trade it and how to trade it in 2020, including online charts, signals, strategy, exchanges, news and more.

EUR/USD Trading Brokers

Chart

Why Day Trade EUR/USD?

As the most popular of the major pairs, the EUR/USD trade vehicle is often highlighted on trading platforms and exchanges. But why do so many day traders opt to pursue profits from this pair?

  • Prevalence – They are the two most popular reserve currencies. Their size leads to an abundance of financial data on the pairing being released. This also makes them relatively straightforward to follow.
  • Liquidity – The EUR/USD promises consistent liquidity, plus low bid-ask spreads.
  • Volume – The huge numbers of active traders and market speculation ensure relatively high levels of volatility. All of which can lead to greater profit potential.
  • Availability of resources – In some ways, short and long-term forecasts are now easier to make. You have access to historical graphs, candlestick and monthly charts, plus customisable indicators. Conducting Elliott wave analysis is more straightforward, for example. In addition, you have online active trading communities. These are often full of weekly forecasts and predictions for today.

So, with historical data downloads just a few clicks away and spreads plastered across the internet, intraday traders have plenty of access to the necessary information.

Drawbacks/Risks

Despite a number of benefits to trading the EUR/USD pair, there also exist certain drawbacks:

  • Volatility – The high levels of volatility within the EUR/USD pair can result in winning positions swiftly turning into losing ones. Often, no amount of historical data and 20-year charts can prepare you for the speed at which prices can swing.
  • Leverage -Admittedly, trading on margin may increase your potential profit. However, it can also amplify losses. So, if you do utilise leverage, making accurate daily and next week forecasts is essential.
  • Automated competition – Unfortunately, even with attractive forward and live quotes, competition is now fierce. You are trading against an increasing number of trading algorithms. You have to manually analyse and react to a bullish market with your interactive chart. However, bots will automatically enter and exit positions once certain criteria have been met.

Influences on Movement

Political Events

Another crucial factor is the political landscape. Instability, as seen in the Brexit referendum, can all influence the direction of the currencies. Yet it isn’t just major elections that play a part, events such as Switzerland’s decoupling from the euro peg will also hit exchange rates.

The challenge comes in keeping an eye on the numerous countries within the eurozone. So, keep abreast of the latest political and economic news.

Combine recent events with EUR/USD historical data on a simple Excel. This will allow you to make more accurate forecasts for 2020 and beyond.

Economic Growth

You will find your EUR/USD live analysis makes far more sense if you have a thorough understanding of what influences direction.

The biggest factor is the strength and outlook of the two economies. Put simply, if the European economy grows faster than the US economy, the euro will strengthen against the dollar, and vice versa.

A telling gauge of economic strength is interest rates. For example, the dollar normally strengthens when US interest rates are higher than those of big players in European economies.

Monetary Policy

As touched upon above, there is also a correlation between monetary policy implemented by the respective central bank and the EUR/USD relationship. This was seen in the 2007 global financial crisis, which was one of the greatest reductions in the euro vs USD history.

During this period, there was an unusual separation between the policy from the US Federal Reserve (Fed) and the ECB in particular.

The Fed looked to aggressively stimulate the US economy early on, with QE measures. The ECB, however, delayed QE measures. The US were purchasing sovereign bonds as a stimulus measure for years before the ECB followed suit.

The two also had somewhat different priorities. Whilst the Fed aimed to increase employment as well as stabilise prices, the ECB was mainly concerned with price stability.

The effect was most forex news stories focusing on the actions of the Fed, whilst the ECB took a back seat. Throw in that many member states were struggling with crippling debt and people soon began to question the longevity and efficacy of a universal monetary policy.

Unsurprisingly, this all led to strange fluctuations between the EUR/USD. Today, therefore, many that are investing focus on projections and expectations of central bank policy to help them form strategies around the EUR/USD.

Currency Correlations

Whilst you may focus your trading efforts on the EUR/USD, there are certain correlations with other currencies to be aware of. You will notice that some currencies feature in numerous currency pairings. This is because all currencies are interlinked. None of them trade entirely independently of each other.

Their relationships are known as positive and negative correlations.

  • Positive correlation – This is when pairs react in line with each other. The three most popular pairs, GBP/USD, AUD/USD, and EUR/USD, are all positively correlated. This is a result of USD being the counter currency. So, any change in the US dollar will impact all the pairs.
  • Negative correlation – This is when currency pairs react in the opposite direction. Popular pairs include USD/CHF, USD/JPY, and USD/CAD. For those unsure which is the base currency, it is the US dollar. This means they move in the opposite direction of the previously mentioned majors where the US dollar plays the counter.

Application

A EUR/USD trader can use this knowledge to better understand the implications of movement in certain pairs. Let’s take the British Pound vs the US dollar, for example. When trading this pair, to an extent, you are also trading the Euro vs the British pound.

Unfortunately, it isn’t quite that straightforward. Economic factors and market speculation can result in shifts in currency correlations. A negative correlation may turn positive and vice versa.

EUR/USD Day Trading Strategy

An effective EUR/USD strategy is more than understanding how you can use pip values and calculators to your advantage. It’s also more than getting a feel for premarket sentiment. It’s about using your investing chart in realtime to consider tick data and weigh up your options.

Timing

Once you have a solid grasp of how EUR/USD market forces interact, you will need to turn your attention to a strategy. 5-minute, 30-minute, weekly, and all-time charts may prove useful, but knowing when to trade is just as important.

Part of the attraction of forex day trading is that you can buy and sell 24-hours a day. Whilst this is true, it doesn’t mean you should. Instead, you want to trade when the EUR/USD pair is active, with plenty of volume and volatility.

For example, when London and Europe are open for business, pairs that feature the British Pound and euro are more actively traded. If you’re day trading with EUR/USD, volume charts show the most active period is when both London and New York are open. These markets are open between 08:00 and 22:00 GMT.

The danger is, if you trade at the wrong times, the cost of spreads and commissions can cancel out your profits. So, many suggest only trading within a three to four-hour window.

Ideal Window

So, when is the best time to day trade EUR/USD binary options, futures and other instruments?

The ideal time is from 13:00 to 16:00 GMT. This three-hour window is when London and New York are both open. Volume from both markets means spreads are normally tightest during this window.

This is also when forex forums come alive and you’ll see the biggest daily moves. All of these factors can result in the greatest profit potential. So, whilst it may be tempting to respond to every buy sell signal you see today, resistance may prove sensible.

Try not to let graph and market noise pressure you into trading on 12-hour intraday forecasts. Focus on what you know and ensure volume validates any potential moves.

Buying & Selling the Breakout/Breakdown

EUR/USD live charts and technical analysis will be needed to succeed with this strategy. You will find the pair swing back and forward within boundaries for considerable periods. This creates clear trading ranges, which should lead to new trends, higher or lower.

Bide your time during the consolidation phases. The reward could be low-risk trade entries when you spot that resistance and support levels ultimately break, leading to a rally or sell-off.

This technique relies on timing. Enter your position too early and you may find the range holds and a reversal is triggered. Go in too late and your risk increases as the position may execute above new support or below new resistance.

Narrow Range Patterns

You will frequently see the pair climb or drop into a substantial barrier and then fall dormant, creating narrow price range bars, leading to minimal volatility. This also results in powerful entry signals for breakouts and breakdowns though.

So, enter your position within the narrow range pattern, placing a tight stop to prevent losses from a major reversal.

The benefits of this method are that the straightforward pattern often predicts price bars will increase in significant breakouts and breakdowns. In addition, it’s low risk as you can place stop-losses close to the entry price.

When it comes to day trading Eur/USD, different strategies work for different people. Some prefer using pivot points, swap points, and forward curves, others will focus on trading around news announcements. Whether you opt for chart investing or not though, be patient, perfecting a strategy takes time.

History

Wind back the clock twenty years, before the mini futures and binary options of today, and the forex markets were a different place. It was the German Deutschmark vs US dollar, plus the French franc vs US dollar that dominated the scene.

However, January 1st 1999 set the wheels in the motion for foreign exchange history. But the road to the euro had been paved decades before that.

There existed two earlier versions of the euro, both were internal accounting units for European Community (EC) members. They were:

  1. European unit of account
  2. European currency unit (ECU)

Neither were ‘real’ currencies. They were groups of specific EC currencies, engineered to help stabilise European exchange rates. Together, they helped form the single currency we all know today.

The ECU section of currencies had a somewhat alternative makeup to those that were to form the euro. But the ECU still played a key part in the historical exchange rate of the euro. The value of one euro was set as the value of one ECU, when it was first created on January 1st, 1999. So, the initial EUR/USD exchange rate was 1.1686.

Despite this, the euro wasn’t to become a physical currency until 2002. However, the 1999 launch brought all the eurozone currencies together, including:

  • German Deutschmark
  • French franc
  • Spanish peseta
  • Italian lira

It was at this point, they stopped having separate, floating historical foreign exchange rates. They were bundled together until they were engulfed into the currency of today.

EUR/USD history data and opinion of the time showed many had expectations the euro would steal the dollar’s unofficial title as the global reserve currency. However, this is a mountain it is yet to climb.

Key Dates

Those that monitor the EUR/USD today are better able to forecast price movements, by taking into account previous events. Some of the most important of which, are as follows:

  • 18th September 2007 – The Federal Reserve System cut fed fund rates by 50 basis points. As a result, this saw the euro strengthen against the dollar.
  • 16th December 2008 – Federal Reserve System cuts rates to nearly zero. Again, this saw the euro strength against the dollar.
  • 19th October 2009 – The new Greek government amends latest deficit forecasts from 6.7% of GDP to 12.7%. This had the effect of weakening the Euro against the dollar.
  • 1st June 2020 – Moody downgraded Greek debt by seven notches to junk status This further saw the euro weaken against the dollar.
  • 18th December 2020 – Federal Reserve System states ‘tapering’ of stimulus will commence in January 2020. Euro continues to weaken against the dollar into February of 2020.
  • 14th July 2020 – The president of European Central Bank (ECB), Mario Draghi, prepares the market for quantitive easing (QE). As a result, the euro weakens against the dollar.
  • 22nd January 2020 – The ECB introduces full-blown QE. This causes the Euro to weaken against the dollar.

EUR/USD exchange rate history and data demonstrate the effect of central bank action on price. So, perhaps those that analyse the Federal Reserve System will be more able to accurately predict fluctuations in the world’s most popular currency pairing.

On top of the factors highlighted in the timeline above, wars, elections and output levels have all influenced the EUR/USD in the past too.

Other Events

There are also a number of other events that have triggered substantial EUR/USD volatility. The biggest of which include:

  • Dot-com bubble – 1997-2001 saw speculation that rocked the EUR/USD relationship. It took years for the dust to settle and stability to arrive.
  • Real estate bubble – The bubble was thought to be a key driver of the 2007-2009 recession that was hugely damaging to the US economy.
  • European debt crisis – The impact of the European Debt crisis is still being felt today, and has had a significant impact on the relationship between the two currencies.

It is worth highlighting, those with an understanding of the past, are often in a better position to predict future price shifts.

Role of the US dollar

The EUR/USD related index you look at today will have been shaped to some extent by the unique role the US dollar has played over the years. These are just a few of the reasons it has grown to become the world’s most important currency:

  • Considered the world’s reserve currency, it is used to settle the majority of international transactions.
  • Many small countries will peg their currency’s value to that of the US dollar, whilst global banks will hold a large portion of currency reserves in US dollar.
  • You will also notice the live price of gold and other commodities is often set in US dollars.
  • The Organization of Petroleum Exporting Countries (OPEC) also conduct transactions in US dollars.
  • It is the most featured currency in popular pairs, so as an aspiring forex trader, you need a solid understanding of what drives the US economy to predict where the US dollar will go.

Role of the Euro

The European Union is the biggest economic region. Its nominal GDP in 2020 is around $18.3 trillion. What some don’t realise when they look at their EUR/USD live chart, is that the euro’s growth is predominantly driven by services and manufacturing. As such, when economic activity slows in the EU, the euro usually weakens.

The euro is unique because 19 of the 28 European countries within the EU use it. Around 400 million people buy and sell with euros every single day. As the euro’s popularity has grown, so have the implications of economic and political events in the EU. So, whilst many traders focus on the catalysts behind the US dollar, to be a successful FX trader, the euro warrants your attention also.

Final Word

When day trading the EUR/USD there are a number of factors to take into consideration. Economic data releases, central bank statements, and the latest news are just a few considerations your strategy must take into account.

If you want to join the likes of Andrew Krieger and Bill Lipschutz in the forex hall of fame, you will also ensure you choose suitable trading hours. You may be able to trade 24 hours a day, but the quality of trades often trumps quantity. Finally, conducting EUR/USD fundamental analysis through charts and patterns is essential.

For more day trading guidance, see our forex page.

How to Trade a Breakout Strategy on the EURUSD

Volatility is on the rise in stocks as the economic outlook is questioned on the heels of a US debt downgrade. EURUSD volatility is surpassing levels not seen since June 2020. When the market gets volatile as we have seen lately , one way to trade it is with a breakout type of strategy.

The Mechanics of a Breakout

Analyze a chart and determine the mood of the market, or trend direction. In the case of the EURUSD, the risk aversion has been contagious lately . Additionally, after finding support at the 200 day Simple Moving Average, prices have failed to create a higher high. Therefore, we will look for and filter for sell trades.

In a selling opportunity, identify levels of support and anticipate a break below support. In a buying market, identify levels of resistance and anticipate a break above resistance. Since we are filtering for sell trades, we are going to identify support and place a trade based on a breakdown through support.

The benefit of breakout trades is that they do not require any indicators on your chart. Take a clean chart and identify levels of support. I have included the 200 day Simple Moving Average (blue line) as that is often used by large institutions as a level of support. Horizontal support rests at the low of Friday’s candle (1.4055). Additionally, the 200 SMA is nearby at 1.3940. This congestion zone of 1.3940 to 1.4055 will likely provide at a minimum temporary support for prices should they fall further.

The Entry and Stop Loss

Place an entry order to sell 1 pip below the support l evel or at 1.3940 .

When identifying our stop placement, scale down to a smaller time frame chart (between 1hr and 4hr time frame). Place the stop loss just above the swing high in this case because we are creating a sell entry order. Now, take twice the distance of your stop loss and project that from your entry point for a take profit level.

One of the important rules of trade management we discuss inside the DailyFX EDU webinars is risking less than 5% of your account on all open trades. ( Here is a short video on Money Management of trades. )

The benefit of a breakout type of strategy is that we can be wrong on the trading idea, meaning the price of the EURUSD can move straight higher from here, yet we miss out on a losing trade. As a trader, not only do I want to enter into winning trades, but I also want to be kept out of losing trades. A breakout style of trading can help navigate volatile waters and keep you out of some losing trades.

Additional Educational Resources

Also, join me tomorrow at 13:00 GMT (9am ET) at the DailyFX Trading Room for a live webinar on trading the USDollar. This is an opportunity to discuss the current market events and ways to trade it on the USDollar. Ask your questions in real time.

I look forward to seeing you there!

Jeremy Wagner contributes to the Instructor Trading Tips articles.

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