EURUSD Trading Strategy – Does It Work? (Backtest)
Last Updated on May 19, 2023
Forex trading is a great way to make money if you understand how the market works, and no currency pair is more liquid than the EUR/USD trading pair. This is why you should consider a EUR/USD trading strategy. Let’s take a look at EUR/USD and the forex market.
EUR/USD trading strategy refers to the techniques for profitably buying and selling the euro currency against the US dollar currency in the foreign exchange market. There are different strategies to trade the EUR/USD pair, such as technical analysis, fundamental analysis, or a combination of both.
In this post, we answer some questions about the EUR/USD trading strategy, and we end the article with a backtest.
Introduction to EURUSD Trading Strategy
The EUR/USD currency pair is the shortened term for the EU’s euro against the United States dollar pair. Its quoted value indicates how many U.S. dollars (which is the quote currency in the pair) are needed to purchase one euro (the base currency). For example, if the currency pair is quoted at 1.0215, it means it takes 1.0215 U.S. dollars to buy 1 euro.
Therefore, the EUR/USD trading strategy refers to the techniques for profitably buying and selling the euro currency against the US dollar currency in the foreign exchange market. The relative strength of each currency determines the value of the EUR/USD pair, and traders can make a profit by correctly predicting changes in the exchange rate. You aim to buy low and sell high (and vice versa if you short).
This pair is considered one of the most heavily traded currency pairs in the world and is often used as a barometer for the overall health of the global economy.
Traders can use a variety of different strategies to trade the EUR/USD pair, such as technical analysis, fundamental analysis, or a combination of both. The currency pair can be traded using different financial instruments, such as Forex, CFD, Options, and futures. In this article, we look at the forex pair.
Benefits of Trading EURUSD
Are there any benefits of trading the EURUSD pair? There are potentially a few of them:
- The EUR/USD is considered a major currency pair, making it less affected by sudden market fluctuations and more stable than other pairs. The pair is less likely to move a lot because of some random macro event.
- High liquidity and tight spreads, which make it easy for traders to enter and exit positions.
- The exchange rate between the Euro and the US dollar is a good indicator of the overall health of the global economy.
- It is available 24 hours a day, five days a week which is ideal for those who want to trade on their own schedule. This might be good for algo traders.
- A wide range of financial instruments such as Forex, CFD, Options, and futures can be used to trade this currency pair, providing traders with multiple ways to access the market.
Tips for Successful EURUSD Trading
Before you start trading, we recommend you do the following. Also, please keep in mind that the pair is heavily traded, and competition is fierce:
- Backtest your trading strategy. If you have not backtested it, how do you know you have a profitable strategy? Most traders never backtest, and they are more likely to fail.
- Use a demo account to practice and gain experience before trading with real money.
- We don’t recommend using both fundamental and technical analysis in your trading strategy. We believe you are better off if you make quantified trading rules that can be backtested.
- Many analysts say you must informed about economic and political developments in both the Eurozone and the United States, as these can have a significant impact on the exchange rate. We say bullshit. The more news you consume, the worse you’ll trade. Keep a distance news feeds.
- Have a clear trading plan, you might include stop-loss and take-profit levels, and stick to it.
- Stay disciplined and avoid impulsive trades based on emotions.
- Do not overuse leverage!
- Keep track of your performance and make adjustments to your trading plan as necessary.
- Diversify your portfolio by trading other currency pairs or financial instruments.
- Learn from your mistakes and use them to improve your trading strategy. Trading is a constant feedback loop!
Common EURUSD Trading Mistakes to Avoid
As mentioned, forex is very difficult to trade. Some common mistakes when trading the EURUSD currency pair include:
- Keeping track of economic and political developments that can affect the exchange rate. This is unlikely to offer any value.
- Lack of discipline and making impulsive trades based on emotions. This, of course, applies to all trading strategies.
- Not having a clear trading plan and sticking to it. Did you backtest?
- Not having a risk management plan. This might be a stop-loss, but better to trade many EURUSD as just one of many strategies.
- Not diversifying your portfolio.
- Not managing your risk effectively.
- Trading with too much leverage and not understanding the risks involved.
- Not keeping track of their performance and making adjustments as required.
- Not using the demo account to practice before trading with real money.
Strategies for Trading EURUSD
There are several strategies that traders use when trading the EURUSD currency pair. They mostly fall into these categories:
- Fundamental analysis: This involves trading based on economic data releases, such as interest rate decisions or GDP reports. These releases can cause the currency pair to experience significant volatility, and traders can capitalize on this by placing trades in the direction of the market’s reaction to the release. The forex is pair is crowded, so we believe this a tough approach to making money.
- Technical analysis: This involves using historical price and volume data to identify key levels of support and resistance and to enter trades when the currency pair approaches these levels. Again, “everyone” is doing this, and you rely on gut-feel.
- Combination of both: Traders may also use a combination of both fundamental and technical analysis to make trading decisions.
- Interest rate arbitrage: Some traders trade the currency pair in the direction of the currency with the higher interest rate to profit from the interest rate differential. This is a carry trade strategy, and they frequently “blow-up”.
- Sentiment analysis: Some traders monitor the actions of other traders to determine how they would trade. This might work, but only if you backtest it.
- Quantified strategies: It might not come as a surprise, but we believe the best approach is to make strict trading rules and then backtest the strategy. If it has worked in the past you might be on to something, if not, throw it away and move on.
Risk Management for EURUSD Trading
Risk management is an essential aspect of trading the EURUSD currency pair. One effective way might be to manage risk is to use stop-loss orders, which automatically close a trade at a certain level of loss. Using take-profit orders to lock in profits also helps limit the risk of giving back profits.
Another important risk management practice is to never risk more than a small percentage of your account on any single trade. Diversifying your trading portfolio by investing in other currency pairs or markets can also help to spread risk. This is the best approach, in our opinion. Trade small over many strategies.
In addition, when trading, you might keep a close eye on the economic calendar, as the release of important economic data can cause significant volatility in the currency markets. You should also be aware of geopolitical events that can have an impact on the currency pair. However, this sounds nice in theory but is very difficult in practice. Again, quantify and stick to the rules.
Above all, have a well-defined trading plan to keep emotions in check and prevent impulsive trades that may increase risk.
How to Determine the Best Time to Trade EURUSD
Determining the best time to trade the EUR/USD currency pair can be challenging as the market is open 24 hours a day, five days a week. However, there are certain times that tend to be more active and offer better trading opportunities. These periods include:
- London/US session overlap: This is when both the European Central Bank and the Federal Reserve are active. It usually occurs between 8 am and 12 pm EST.
- Period of economic data releases: Another active trading period is during the release of important economic data and reports, such as GDP, interest rate decisions, and employment figures. These releases can cause significant volatility in the currency pair, and traders can capitalize on this by placing trades in the direction of the market’s reaction to the release.
What Is the Difference Between the EURUSD and the USDEUR Currency Pairs?
The main difference between the two currency pairs is the way they are quoted and the direction of the trade. In EURUSD, the base currency is EUR, while the quote currency is USD. For the USDEUR, the EUR becomes quote currency and the USD the base currency.
For example, if the EUR/USD exchange rate is 1.20, it means that 1 Euro is worth 1.20 US dollars. In contrast, if the USD/EUR exchange rate is 0.83, it means that 1 US dollar is worth 0.83 Euros.
The EUR/USD is most commonly used among traders and investors, and it is considered the most liquid currency pair in the world.
What Economic Factors Affect the EURUSD Exchange Rate?
Economic factors affecting the EURUSD exchange rate include interest rate decisions, GDP reports, inflation, and unemployment rates of the European Union and the United States.
The exchange rate can also be affected by geopolitical events, trade policies, and natural disasters.
The interest rate differential between the European Central Bank and the Federal Reserve also plays a significant role in determining the currency pair’s direction.
Additionally, the relative strength of each economy can also have an impact on the exchange rate.
What Are the Most Popular Currency Pairs for Trading EURUSD?
The most popular instruments for trading the EURUSD currency pair include forex spot trading, currency futures, currency options, and currency exchange-traded funds (ETFs).
Spot forex trading involves buying and selling the actual currency, while futures and options trading allow traders to speculate on the future price movements of the currency pair.
ETFs provide a way for investors to gain exposure to the EUR/USD pair without having to directly buy or sell the currencies.
Keep in mind that futures and spot prices might get different results in a backtest. If you have a profitable strategy in EURUSD spot forex, it might not work on the EUR/USD futures pair.
What Are the Advantages and Disadvantages of Forex Trading?
Forex trading offers several advantages, including:
- High liquidity: The forex market is the largest financial market in the world, with a daily trading volume of over $6 trillion. This high liquidity means that it is easy to buy and sell currencies with minimal price slippage.
- 24-hour market: The forex market is open 24 hours a day, five days a week, providing traders with the flexibility to trade when it is convenient for them.
- Leverage: Forex brokers offer high leverage ratios, allowing traders to control large trades with a relatively small amount of capital. However, leverage is almost always the downfall of any aspiring trader.
- Low transaction costs: The costs of trading forex are generally low, with most brokers charging only a small spread on currency pairs.
However, forex trading also has several disadvantages, including:
- High risk: Forex trading is considered a high-risk activity, as currency values can fluctuate rapidly and unpredictably.
- Lack of regulation: The forex market is decentralized, which means that there is no central governing body to regulate trading activities. Many forex brokers are scams.
- Requires knowledge and skills: To be successful in forex trading, you need to have a good understanding of the market and what works and what don’t work.
- Highly leveraged: Leverage can be a double-edged sword. While huge leverage ratios can amplify gains, they also increase the risk of losses.
How to Analyze the EURUSD Market and Make Profitable Trades?
To analyze the EURUSD market and make profitable trades, traders can use a combination of technical analysis, fundamental analysis, and market sentiment. Technical analysis involves studying charts and using indicators to identify trends and potential entry and exit points.
On the other hand, fundamental analysis involves studying economic data and events, such as interest rate decisions, GDP reports, and political events that can affect the value of the EUR and USD.
Market sentiment refers to the overall attitude of market participants towards a particular currency pair. It can be measured by analyzing the positions and sentiments of traders and investors. It’s also important to consider the risk management strategies like setting stop-loss and take-profit levels.
However, the best approach is to use a quantifiable approach. Make strict trading rules and backtest them.
What Is the Best Forex Trading Strategy for EURUSD?
The best forex trading strategy for EURUSD will depend on the individual trader’s risk tolerance, trading style, and experience. However, some popular strategies include the following:
- Position trading — involves holding positions for a longer period of time and capitalizing on long-term trends.
- Swing trading — involves holding positions for several days and capitalizing on intermediate-term trends.
- Day trading — involves opening and closing a position within the same day.
- Scalping — involves taking advantage of small price movements by holding positions for a very short period of time. This is attractive for many, but is scalping profitable? We believe it’s mostly a waste of time.
What Are the Benefits of Automated Trading in EURUSD?
The benefits include:
- Increased efficiency and speed in executing trades based on pre-defined rules and algorithms.
- Reduced emotions and psychological biases that may affect trading decisions
- The ability to monitor multiple markets and currency pairs simultaneously
- Backtesting capabilities to evaluate the performance of a strategy before implementing it in live trading
- The ability to handle large-volume trades, which can be difficult for manual traders
- The possibility of implementing advanced strategies that may be too complex for manual traders
Please also read our algorithmic trading guide.
What Are the Risks of Trading EURUSD?
Some of the risks associated with trading EUR/USD include:
- Volatility risk: the risk that the value of the currency pair will fluctuate rapidly, which can lead to sudden losses.
- Liquidity risk: the risk that it may be difficult to buy or sell a currency pair at a fair price, especially during times of market stress.
- Interest rate risk: the risk that changes in interest rates will affect the currency pair’s value.
- Political and economic risk: the risk that political or economic events in the Eurozone or the United States will affect the currency pair’s value.
- Leverage risk: the risk that traders may lose more than the amount they have invested due to the use of leverage.
What Are the Most Popular Technical Analysis Indicators for EURUSD?
The most popular technical analysis indicators for EUR/USD include:
- Moving Averages, which smoothen price data and help to identify trends and potential reversals
- Relative Strength Index (RSI), which helps to identify overbought and oversold conditions
- Bollinger Bands, which help to identify volatility and potential breakouts
- Fibonacci retracement tool, which helps to identify key levels of support and resistance
- The stochastic oscillator, which helps to identify overbought and oversold conditions
- MACD (Moving Average Convergence Divergence), which helps to identify momentum and trend strength
What Are the Most Popular Fundamental Analysis Strategies for EURUSD?
The most popular fundamental analysis strategies for EURUSD include:
- Interest rate differentials, which compares the interest rate of the Eurozone to that of the United States
- Economic indicators, such as GDP, inflation, and unemployment rate
- Political stability and events, such as elections
- Trade balances and current account deficits or surpluses
- Monetary policy, such as changes in interest rates or quantitative easing, which can affect the currency pair’s value
What Are the Most Popular News Events That Impact EURUSD?
The most popular news events that can impact EUR/USD include:
- Interest rate decisions by the European Central Bank (ECB) and the Federal Reserve (Fed)
- Economic indicators such as GDP, inflation, and unemployment rate releases, as well as trade balance and current account data
- Political events such as elections and policy changes in the Eurozone and the United States
- Monetary policy statements and press conferences by central bank officials
- Speeches by political leaders and economic experts on the Eurozone and US economy
How to Manage Leverage and Volatility When Trading EURUSD?
When trading EURUSD, it is important to manage leverage and volatility by using risk management techniques such (for example) as setting stop-loss orders and using proper position sizing. Those must be a part of your trading plan. Before you use an arbitrary stop-loss, please make sure it’s smart by making a backtest. Mostly, a stop-loss makes the strategy worse, please read why a stop-loss is a bad idea.
You also to stay informed about economic events that may impact the currency pair, such as interest rate decisions and economic data releases. However, we believe you are unlikely to develop a trading edge looking at that.
What Are the Most Popular Trading Platforms for EURUSD?
The most popular trading platforms for EURUSD include MetaTrader 4 and 5, cTrader, and NinjaTrader. These platforms offer advanced charting, technical analysis tools, and the ability to automate trading strategies. They are also widely supported by brokers and offer the ability to trade with leverage.
In addition to the above, other popular platforms include TradingView, which is widely used for charting and technical analysis, and eToro, which is known for its social trading features.
On this website, we use Amibroker. We both backtest and trade live with that platform.
Is EURUSD Easy To Trade?
In our opinion, forex is damn hard to trade, and we believe EURUSD is one of the worst among all the currency pairs. We have written earlier why we believe forex is a tough place to make money:
We are not trading EURUSD ourselves. We have found nothing worth trading (so far).
EURUSD trading strategy backtest – does it work?
Let’s look at a potential trading strategy for the EURUSD forex pair.
We like to look at seasonal patterns, and EURUSD offers some exciting patterns. Here’s one for you:
We looked at the different trading days, and it seems EURUSD has different performances depending on the time of the month: performance in the first half of the month is weak and strong in the second half.
Let’s make the following trading rules:
- We short at the close of the first trading day of a new month, and
- We cover at the close of the tenth trading day.
The 242 trades returned an unleveraged gain of 0.1% per trade and the following equity curve:
It is, of course, not a tradeable strategy, but it shows some promise.
Can it be improved?
Yes, we added a momentum filter, and the number of trades went down to 126, but we doubled the average gain per trade. We got the following equity curve:
It’s an improvement, but still not desirable.
As of writing, we have 3 EURUSD strategies in incubation. Over the last five years, we’ve had nine EURUSD strategies for a 12-month trial, but none has passed the incubation period. As a rule of thumb, almost no forex pair passes 12 months out of sample tests. Compared to stocks and bonds, this is very low.
The logic (and code) for the last backtest with the momentum filter is available in our product called Code And Logic For All Free Strategies.
List of trading strategies
We have written over 1000 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.
The code for the backtested EURUSD trading strategy is included in the package.
The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation.
The strategies are taken from our landing page of different trading strategies.
The strategies also come with logic in plain English (plain English is for Python traders).
For a list of the strategies we have made, please click on the green banner:
These strategies must not be misunderstood for the premium strategies that we charge a fee for: