The EUR/USD is by far the most commonly traded of all the currency pairs on the Foreign Exchange market.
It would be easy to assume that this is purely due to the fact that the USA and the Euro zone economies are the biggest in the world and therefore believe that the demand for their currencies, the Euro and US Dollar, would surely be greater than the demand for any of the others, but I believe that there is more to it than that.
Currency speculators seem to like trading the EUR/USD more than they do any other FX pair, so the demand for this particular pair seems to be driven by far more than just the non-speculative demand for those particular currencies. And in this article, I am going to write about why I believe that is.
The EUR/USD: Why Do Speculators Like It So Much?
There are of course many reasons why so many traders favour trading the EUR/USD pair, high liquidity, the stability of these countries make it more predictable, it is most active in the New York and London session etc, these are all no doubt factors.
But I don’t believe that any of these factors are the main reason why that particular pair is so popular.
The reason I believe that the EUR/USD is so popular amongst traders is, in a word, it’s because of the trend.
Most good currency traders and currency trading strategies are trend following in nature and the fact is that the EUR/USD seems to be the best trending currency pair in the world with the longest lasting and cleanest trends. It would therefore make perfect sense to assume that trend followers were simply seeking out the best trending markets.
Of course, most small retail Forex traders are not actually trend followers, but then again most small retail Forex traders fail and lose their trading accounts; which is exactly the fate that you would expect to see befall those going against the trend in a strongly trending market. But most of the speculative money at least is following the trend, even if most of the traders aren’t.
In the Forex market the speculative money tends to flow from the majority of small retail traders who generally gamble by trying to pick short-term tops and bottoms to a small group of large traders and financial institutions who are usually trend following in nature – and the market will of course naturally do everything that it needs to do in order to dupe the small FX traders into taking the other side of these big fishes trades. For more information on this phenomenon I have written several articles on why the crowed is usually wrong.
Believe it or not long-term trend following is, despite the simplicity of the concept, probably the most difficult of all technical trading strategies to follow as it really goes against the grain of human nature for a number of reasons.
Firstly, trend following trading strategies aim to maximise the amount one wins rather than the frequency with which one wins.
It is not uncommon for a trend following system to produce more losing trades than winners; it is just that some of the winning trades tend to be a lot larger than any of the losing trades. This is certainly a very simple and rational way to trade markets that trend well, but unfortunately for us the human mind is not rational.
Most people will find it very difficult to handle lose after lose as they hang on waiting for that one big winner that is supposed to come along now and again and pay for all the losses. And not only that, when a winning trade does appear the natural human reaction is to want to close it and crystallise the gains before they disappear when trend following actually demands that we let these winners run and run as long as the trend continues.
Secondly, trend following trading strategies are usually medium to long-term trading strategies. Many people prefer day trading as it takes great discipline and self control to stick to a long-term trading strategy and keep on following the same rules, day after day after day… It is also natural to feel like changing the rules as soon as something goes wrong and you lose money. Getting the confidence to stick with a trading system through thick and thin isn’t easy.
People understand intellectually that loses will come and should be accepted as the cost of trading, but even when one has accepted this intellectually there will still be an underlying feeling that this particular trade needs to be one of the winners.
And lastly, although there are many other reasons why trend following is so difficult that I could write a book about if only I had the time, it is a normal human reaction to look to buy value, that is, we naturally want to buy low and sell high. Buying low and selling high is of course a sound trading strategy on some markets, but it is not usually a sound trading strategy on the Forex market and especially not on the EUR/USD pair. Trend following trading strategies aim to buy high and sell even higher, or sell low and buy it back again even lower still. Human beings on the other hand tend to judge their expectations of the future based on their experiences in the past and feel that if something is higher than it has ever been it is likely to fall because they have often seen the market lower, but never higher and vice versa. The only exception to this rule seems to be when trends last many years and people start to forget that there was ever a time when the market wasn’t rising; when this happens and people start saying that a certain market ‘only ever goes up’ then that is a sure sign that the trend is coming to an end.
But on strongly trending markets, and the EUR/USD does tend to trend strongly, if higher highs are continually being made then the trend is up and if lower lows are continually being made then the trend is down. When a trend is clearly established on markets like the EUR/USD it is by no means certain that it will continue but it is, as a general rule, more likely to continue than not (although that is about the most that one can really say about it). For more information on this I have an article on the the psychology of trading and different types of markets.
It should now therefore be clear to see why the large traders who are trend following in nature like trading the EUR/USD and why the majority of small retail Forex traders get ‘suckered’ into taking the other side of their trades.
If you’re interested in trading the EUR/USD then I would recommend trying to develop the discipline necessary to become a trend follower, the hardest part of which is no doubt learning to conquer the beast within. I have setup a small blog on letting profits run which contains a simple system/exercise aimed at helping the reader to learn to let their profits run and cut their losses quickly.