The euro has had a rough go of it over the past few years, having experienced a number of ups and downs and financial crises. However, there’s no real sign that things are going to get any better, with analysts warning that the situation is likely to get worse before it gets better. This article looks at some of the most common mistakes made by novice forex traders, who could benefit from understanding the in’s and out’s of forex trading.
Many traders believe that the Euro is a safe haven for those wanting to invest in international currencies. This is partly due to its comparatively stable economic status, which hasn’t hurt investment in the country. The Eurozone economy is relatively solid, and therefore there hasn’t been any serious political or financial crisis or major financial shake up.
This hasn’t prevented European citizens from investing abroad, either. The single currency has been a popular choice in the past for those looking to diversify their portfolios. By purchasing leading currencies, such as the UK’s pound, US dollar, Swiss franc and Japanese yen, investors can make much bigger gains by exchanging their local currency for the others. But while the exchange rates are favourable, they don’t provide any insight into which currencies should be bought or sold. Spot prices for these currencies are only applicable to those markets where monetary policy is based, such as the European Central Bank and the Bank of Japan in particular. Unless you’re part of these institutions, you won’t be able to accurately predict which currencies will perform well in specific situations.
The forex market works on a lot more than just spot prices, however. Developed economies and emerging countries provide information on economic data, as well as news from important political events. As well as this, different countries’ currencies are always likely to react differently to fundamental factors, such as general elections, shocks to the economy or even terrorist attacks. The mix of all these variables means that it’s impossible to base your trading decisions on a single currency pair. You need to know about the other currencies as well, and exchange rates between them to get an overview of how each currency pair is likely to evolve over the coming weeks or months.
So how do you get the best insight into what’s happening in the currency markets? You don’t want to make the same mistakes as many other traders who decide to trade the EUR/USD pair. The two most common mistakes made are buying the EUR, when the euro is strengthening and selling the EUR when it’s weakening. Avoiding these common mistakes means that you’ll have a much higher success rate when trading the forex trading pair.
One thing you’ll want to avoid is trading the major currency pairs in the same day. While it may seem like a good idea from time to time – especially when you have the benefit of low leverage – you’ll find that the EUR/USD and the USD/JPY currency pairs are less liquid than some of the other major currency pairs. For example, while the CHF is quite highly liquid (with a daily range of more than US$1.5B), the EUR/CHF is nowhere near that.
On the other hand, trading the euro and the Japanese yen (or the GBP/JPY) is much more liquid (at least in Europe). There are always traders who are selling the euro and buying the other two, so you’ll always be able to find buyers in this pair. Traders who trade the major currency pairs every day are far more likely to miss out on good trading opportunities. And of course, if you’re one of those people who can only be found online, it becomes even harder to keep up with the latest news and analysis.
If you’re looking for a good trading strategy, the euro/USD is a good place to start. The EUR/JPY is another possibility, since the EUR/CHF is not going to move very far from its current levels. However, there is no reason to think that you can’t use both of these pairs to your advantage. You can make a killing on the EUR/CHF trade and make some decent gains on the euro when it goes against the US dollar. So go ahead and give them a try!