AUD/USD forex trading, also known as ‘Aussie,’ became one of the top currency pairs in the past years. The pair combined the influential expanding economies of Australia and the United States as an outcome of the commodity increase of Australia in the past decades. In this article, you will about to learn everything about the AUD/USD pair. We will start from its advantages, disadvantages to currency correlations, strategy, history, signals, trading hours, and so much more.
What Is AUD/USD?
For a better understanding of the AUD/USD pair, we have to dig deeper on its precise meaning. AUD/USD is the exchange rate that shows how many US dollars are needed to buy one Australian dollar.
As of today, the AUD/USD pair stands as the fourth most actively traded currency pairs around the world. In the past few years, this pair has recorded where it shows around 7% of total forex market turnover. But, it is not among the six that makes the US dollar index or USDX.
Reasons To Trade With AUD/USD
Here are some of the reasons to trade with the AUD/USD currency pair:
- Economic Stability – According to data, the Australian economy boosts through commodities and exports while keeping a solid foundation through a central bank. The economy of the country even keeps on growing year after year. While at the same time, other countries have suffering economies due to the global economic downturn.
- Volatility – Day traders can get benefit from the fantastic volume and volatility of AUD/USD currency pair because of the high-interest rate differential between Australia and the US. It means more chances to turn profits. The pair also run upwards much faster than others, especially in bull markets. On the other hand, it can drop to low levels much more quickly in bearish market environments.
- Trading Relations And GDP – Australia has a trading relationship with China, allowing its economy to avoid the effect of the global financial crisis. Also, the Australian GDP is increasing, and it makes investing in these countries favorable.
- Major Currency Performance – In the past years, the Australian dollar became the highest performing currency among other major currencies. It is recorded to have an increase in excess of 30% than the US dollar.
- Availability Of Resources – Thanks to the array of resources available, the daily and weekly analysis became easier today. Forums and websites provide market overviews as well as study. You can conduct Elliott wave analysis as well as bespoke indicators, 5-minute, 1-minute, 15-minute, and 1-hour charts.
- Diverse Trading Vehicles – Because of the increasing popularity of AUD/USD, traders can take advantage of a variety of trading vehicles, including ETFs, to E-micro futures, as well as a broad spectrum of options.
The Risks and Drawbacks Of AUD/USD
The AUD/USD currency pair still comes with risks and drawbacks despite its outstanding growth and attractive trends. Here are the standing risks when trading with AUD/USD:
- Volatility – One of the appealing advantages of this currency pair is its volatility. Yet, it is can also lead to significant losses. For this reason, traders must utilize an effective money management system when investing substantial capital with the AUD/USD currency pair.
- Stability Misconception – Often, traders become so confident about how stable the US economy over others like Australia. But since it is a cross pair, traders must study both economies first, comparing them with one another. Keeping yourself updated with the economic and political issues in both countries could cost you a great fortune.
- Leverage Risks – With AUD/USD, trading on a margin enables you to borrow resources to level up your position. The thing is, it can boost potential profits, and it may also amplify losses.
- Automated Competition – Even if you have an attractive offer spreads, along with real-time graphs and bar charts from predicting your chances of making a considerable profit. The competition in the market today is on another level due to technological advancement. You are now competing with cutting-edge trading algorithms that are not existing before.
Influences on Movement
There are a variety of factors that affect the prices, which include the following:
Trading and Commodities
- Trading Correlations – This factor is especially crucial for the Australian dollar since the Australian economy is closely associated with trading relationships in Asia. For this reason, the chances of India, China, and other times, Japan commodity demand can affect the strength of AUD.
- Commodity Prices – The role in commodities of the Australian economy can sometimes shape it. Australia is the largest iron ore and coal exporter. So, when commodity prices increase, the Australian dollar most often levels up. At the same time, the decrease in the price of commodities can weaken the Australian dollar.
When trading with AUD/USD, also consider relevant currency correlations. It is important to note that currency pairs don’t move on their own. You can imagine the success and failures of particular currency pairs having a domino effect on others.
Correlation is a statistical measure that ranges from -1 to +1. A pair that falls on the side of ‘0’ correlation depends if the currency pair is negatively or positively correlated.
To help you understand the meaning of negative and positive correlation on currency pairs, check out the brief explanation below:
- Negative Correlation – This type of correlation on currency pairs happens when the pair move in the opposite direction. Among the examples of pairs having a negative correlation are USD/JPY, USD/CHF, and USD/CAD. These pairs have a negative correlation since their base currency is the US dollar.
- Positive Correlation – When pairs move along with each other, they have a positive correlation. Some of the positively correlated currency pairs are GBP/USD, AUD/USD, and EUR/USD FX. These pairs have a positive correlation because the US dollar is their counter currency, allowing each currency to reflect changes in USD.
AUD/USD also has a positive correlation with gold, which all traders must know. When gold goes up, the pair goes down and vice versa. It means you can easily forecast the movement of AUD/USD pair the next day by monitoring the movement of gold in the market.
Day Trading Strategy For AUD/USD
Below are some of the factors that you have to keep an eye on to enhance your day trading performance with AUD/USD:
Timing can make a massive difference on your day profits, especially when day trading online or live with AUD/USD pair. While forex trading is available 24/7, there are particular times when higher levels of volume and volatility are required to garner substantial profits.
Australian working hours have the most prominent daily moves as well as higher volume. Also, observe the most active US trading hours. You must also monitor non-farm payrolls, economic reports, durable goods orders, as well as consumer inflation data, which can all start significant shifts and spikes.
If you want to observe the most considerable volatility, strictly keep an eye on day trading from 00:00 to 02:00 GMT and 06:00 to 08:00 GMT. The most trade and volume activity is best between 12:00 and 17:00 GMT.
When it comes to trading, the trader has their own way of coming up with decisions. Some utilize basic daily charts and historical price charts, while others base their expectations on the news.
Issues in the market can result in economic sentiments, which can speedily shift with breaking news. If you can monitor the current events in a particular economy through news updates, then you can capitalize on such a method.
Here are some of the most reliable news resources that you can trust:
Experienced Forex traders also explain unusual daily moves and obscure trends for these news sources. When used correctly, news updates can be a powerful tool that you can include in your day trading utilities.
Often, AUD/USD discussion circles around sell and buy rates, opening and closing positions, hourly forecasts, and daily ranges. Yet, it does not include how to lessen risk. If you don’t equip yourself with an effective money management system, you will still be out of the game in the future.
A money management system is your protection against potential losses by determining your position size. Most of the traders recommend the limit of 1 to 2 percent of your account balance, which you can risk in a single trade. Like for example, having a $10,000 in your account means you should only bet $100 to $200 in one trade. Losing with a limited fortune will prevent you from breaking your bank.
The Early History Of AUD/USD
In the past, the Australian dollar is associated with the British pound, falling and rising alongside the currency. But in 1946, this changes. The AUD was pinned to the US dollar in a short period before it came back to the British pound.
In 1996, the Australian dollar was declared as a decimal currency. It was followed by the deregulation of the financial system of the country, which results in significant price movement in forex rates globally. At the same time, the open market system became crosshairs of Australia’s reserve bank.
Starting in the year 1983, the AUD/USD pair started to show its real potential. Iron, copper, and gold exports were all partly behind this strength, representing about 1 Billion Australian dollars and around half of the total export of the country.
Today, Australia and its currency enjoy constant growth due to its trading relations with China, as well as its stable exporting with others.
The Recent History Of AUD/USD
The past shaped your current AUD/USD forex outlook today. It means studying the relationship of this currency pair can help you to make better predictions and exchange rate forecasts.
The fame of trading AUD currency pairs, as well as the Australian economy, shows an increase in the past years. The year 2012, the AUD/USD pair stands as the third most popular currency pair worldwide, surpassing two pairs just within two years. Among the significant factors that contribute to this success are high-interest rates, stable trading relationships with China, and commodity-exporting. The economy of Australia began growing since the year 2001, having only one global financial crisis during the year 2008.
The Role Of US Dollar
Without understanding the vital role of the US dollar, a trader can’t come up with accurate daily, weekly, or monthly forecasts. The GDP of USD represents about 25% of the global nominal GDP, and it is second to China as the largest trading nation worldwide.
Also, the United States stands as the second biggest manufacturer. The year 2013, the country’s industrial production hits $2.43 Trillion, which is more than the output of France, Germany, Brazil, and India combined.
- Here are some of the crucial roles of the US dollar:
- Some currencies adopt the USD instead of their own, while others associate their own currency to USD’s value.
- 87% of forex trades associates the US dollar in the past years.
- The US dollar is often used primarily to settle international transactions.
- Various banks worldwide hold currency reserves in USD.
- OPEC countries make oil transactions using USD.
The Role Of Australian Dollar
Knowing the role of the Australian dollar is also important when trading with AUD/USD. The currency’s economic influence determines currency forecasts.
As of today, Australia ranks as the 12th biggest economy in the world. It has an outstanding $1.56 Trillion GDP in the year 2013, and its services make 68.6% of GDP. Media, finance, education, and logistics are Australia’s most essential services.
Both AUD and USD have a strength that is determined by the success of their exported goods. For this reason, the Australian dollar has a significant role in international trade.
Here are some of the key indicators that you can consider to make accurate predictions on your real-time forex chart:
- Trade Balance
- Consumer Price Index (CPI)
- Employment Change
- Producer Price Index (PPI)
AUD/USD gives day traders some hope due to its characteristics that are essential for generating substantial profits, such as volatility and liquidity. On the other hand, trading with this currency pair comes with fierce competition between traders, making it essential to consider different trading elements.