The EUR/USD is the most widely traded pair among all available currency pairs. It represents 50% of all currency trading volume worldwide. Traders focus on the EUR/USD even if they are trading other pairs because it influences the entire market. This pair is also known to follow technical set ups and traders can anticipate the market direction using technical analysis with a higher chance of getting it correct, as opposed to using technical analysis for trading illiquid currency pairs or pairs which are controlled by central banks for the protection of their own currency such as the Yen and the Swiss Franc, and we all saw what happened with the CHF last week when the Swiss National Bank intervened.
We discussed in a previous post how two tops formed on the EUR/USD daily chart and also looked at a descending triangle chart pattern which formed on the same chart about a week later. Both patterns showed bearish direction which took place and materialized on Friday September 9th, 2011.
Now traders are looking at the market and trying to anticipate the market direction for the EUR/USD and based on their anticipation, positions will be established. There will be traders who think that the EUR/USD has made a big move to the downside and expect it to rebound back up, and there will be other traders who will look more closely and consider the debt issue in Europe and think that it is far from over and therefore they will anticipate an even further decline for the pair.
I want to draw your attention to a widely used tool in trading forex, Fibonacci retracement levels. Usually when the market makes a big move in any direction, there is a retracement for this move. This retracement could be interpreted into different outcomes but the most popular explanation is that these levels represent profit taking levels as well as traders on the other side of the trade for whatever reason. As for the technical analysis for Fibonacci’s, simply there are different price levels which the market is expected to retrace to these levels influenced by different conditions. Traders will use the different levels to enter or exit the market based on their expectation. The most difficult part in calculating Fibonacci retracement levels is setting up the levels. Once that is done correctly, you have a much better chance of finding a profitable trade.
On the attached chart we see that the EUR/USD pair has dropped from 1.4550, which is the high of the swing high down to 1.3501. The market the retraced back up to the first Fibonacci price level of 1.3738.
To read more about Fibonacci levels, please follow the link below:
To read the article for the tops and descending triangles on the EUR/USD, please follow the link below: