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AUD/USD Forex Pair Trading Guide and Strategies

Date Modified: 07/04/2024

AUD/USD is a unique currency pair because of the uncommon factors that influence the trajectory of its exchange rate. Hence, it requires a solid understanding of the AUD/USD currency pair, its market, and effective trading strategies, as provided in comprehensive detail in the article below.

an illustration of the AUDUSD pair

Main Points:

  • AUDUSD is the most popular and most traded commodity currency pair in the forex market.
  • The AUDUSD currency pair is sensitive to global economic cycles hence its price movement tends to trend for an extended period.
  • Trading the AUDUSD currency pair offers various advantages, yet it comes with inherent risks. Therefore, it must be approached with caution.
  • Learning how to trade AUD/USD including strategies like following trends, trading within defined ranges, capitalizing on breakouts, news trading, and carry trade are commonly applied in AUDUSD trading.

What Is AUD/USD?

AUD/USD (AUDUSD) is the ticker symbol used to indicate the exchange rate between the Australian Dollar (AUD) and the US Dollar (USD). The value of the exchange rate illustrates the equivalence of one US Dollar to the Australian Dollar.

The Australian Dollar is known as a procyclical currency because its natural resources make it sensitive to global economic cycles while the US Dollar is known as a reserved currency because it is widely held by central banks and other financial institutions around the world as part of their foreign exchange reserves.

How to Trade the AUD/USD Forex Pair

When considering a financial instrument that can be used to speculate on the price movement of the AUD/USD forex pair without swapping or directly owning it, Contract for Differences (CFDs) stands out as a suitable option because of its accessibility and flexibility.

With CFDs, you can open a position to either buy or sell AUD/USD, aiming to potentially profit from the difference between the price when you enter a trade and when you exit the trade. This method doesn't require large amounts of upfront capital and you don't have to worry about not being able to find a buyer or seller when you want to close your position.

Features of Trading AUD/USD CFDs

Traders involved in trading AUD/USD CFDs may experience the following:

Leverage: CFDs allow you to utilize leverage to trade larger position sizes with relatively smaller capital. This can magnify both potential gains and losses.

Flexibility: The availability for trading AUD/USD and its frequent price swings makes it suitable for both day traders, swing traders, and position traders.

Liquidity: Being one of the currency pairs in the major category of the forex market, AUD/USD experiences significant liquidity and trading volume.

Cost Effectiveness: As a result of high trading activity, market spread, which is the difference in bid and ask prices, tends to be smaller, and there's less likelihood of experiencing slippage.

Volatility: The potential for rapid changes in the price movement of AUDUSD due to interest rate disparity in both currencies offers traders regular opportunities to find buy and sell trades.

The Risks of Trading AUD/USD CFDs

Traders involved in trading AUD/USD CFDs are also exposed to risks such as the following:

Leverage: The ability to control larger position sizes puts your funds at risk of the market moving against your position. This can lead to substantial losses exceeding your initial deposit.

Volatility: The AUD/USD pair can be extremely volatile due to its susceptibility to changes in economic data, political events, and global market sentiment. Without adequate risk management, these factors may result in unforeseen losses.

Costs: Spreads (difference between bid and ask prices) and other charges like overnight fees may erode some of your capital or potential profit.

What Are Some AUD/USD Trading Strategies?

AUD/USD trading may suit various trading styles and strategies, making it versatile for traders with various preferences. Some AUD/USD trading strategies include:

AUD/USD Trend Trading Strategy

AUD/USD trend trading means opening buy trade positions on AUD/USD only when the market is in an uptrend or opening sell trade positions only when the market is in a downtrend. This trading strategy is mostly used because it tends to achieve a better risk-to-reward ratio. Traders often plot technical tools and indicators like trendlines, moving averages and Bollinger bands, as overlays on price charts to help confirm if the price movement of AUD/USD is trending.

AUD/USD Range Trading Strategy

This strategy is effective during periods of uncertainty when the price movement of AUD/USD is not trending. It involves identifying a consolidating price range where the market has been trading for a while, with the expectation that the market will remain within the price range for an extended period. Hence, traders may sell at the top of the range as resistance or buy at the bottom of the range as support.

AUD/USD Breakout Trading Strategy

This strategy revolves around spotting consolidation phases characterized by narrow price ranges or identifying support and resistance levels in the market. When volatility increases, traders can capitalize on the breakout from the narrow price ranges or the support and resistance levels.

AUD/USD News trading

News trading involves buying or selling the AUD/USD before or after the release of important economic data to capitalize on the immediate and rapid fluctuation in price movement. The market environment during high-impact news releases can be very volatile requiring robust risk management practices.

AUD/USD Carry Trade Strategy

Carry trade involves trading to profit from the interest rate differential of two assets or currencies. In the context of AUD/USD CFDs, carry trade means buying or selling the AUD/USD to potentially profit from the interest rate difference between the US Federal Reserve and the Reserve Bank of Australia.

A Step-By-Step Guide to Trade AUD/USD

  1. Account Setup
  2. First and foremost, you may consider opening a trading account with a CFD forex provider that offers trading on Forex CFDs like AUD/USD CFDs. Plus500 provides access to trading AUD/USD CFDs on both demo and real accounts:

    • Demo Account: This is an account with real-time price feeds where you can practice different AUD/USD trading strategies without risking any real money.
    • Real Account: This account is used to trade AUD/USD CFDs with real money. Opening a real account will require you to verify your identity and deposit funds that can be used for trading.
  3. Access a Trading Platform
  4. A leading forex CFD trading platform like the Plus500 WebTrader provides traders with an interactive and user-friendly platform well-packed with advanced charts and technical indicators. It also includes an economic calendar and sentiment tool to provide market insights about the AUD/USD currency pair. The effective application of these tools can be useful in predicting the right direction of the AUD/USD price movement.

  5. Market Analysis
  6. When trading AUD/USD, market analysis is a crucial step to help in analyzing its price movement and forecasting the potential direction of the pair. Examples of market analysis include technical, fundamental, and sentiment analysis. A blend of all these analytical concepts may help to make good trading decisions.

  7. Order Type Selection
  8. After deciding to buy or sell AUD/USD based on your market analysis. You may open a buy position or a sell position using the two types of orders:

    • Market Order: This ensures your trade on AUD/USD is instantly executed at the current market price.
    • Pending Order:This feature enables you to establish a specific price above or below AUD/USD current market price where your buy or sell trade should be activated.
  9. Position Sizing and Risk Management
  10. Robust risk management remains a crucial aspect of forex trading. Therefore, prior to initiating any long or short position on AUD/USD, it is important to define the risk management parameters for each trade. Risk management parameters include:

    • Position size: Also known as contract size or leverage size. This should be approached with caution. Note that leverage can maximize your losses just as it can your profits.
    • Stop-loss: This is the predetermined target set to limit the loss of your trades.
    • Take-profit: This is the predetermined target set to exit from a profitable trade.
  11. Executing the Trade
  12. After inputting the order types and risk management parameters.

    • Buy AUD/USD: If your analysis suggests AUD/USD will rise immediately or at a certain price. You may open a buy position using a market order or pending order.
    • Sell AUD/USD: If your analysis suggests AUD/USD will drop immediately or at a certain price. You may open a sell position using a market order or pending order.
  13. Monitoring the Trade
  14. As your open position unfolds, there may be sudden shifts in the market conditions linked to the Australian Dollar or the US Dollar. By staying abreast of these changes such as news events, economic announcements, or sudden shifts in market sentiment. Traders can decide to adjust or close open positions.

  15. Exiting the Trade
  16. If you've set a stop-loss or take-profit order, your trade will close automatically when the price hits either target. Alternatively, you may also decide to manually exit your trade before the price gets to your stop-loss or take-profit targets.

What Are Some AUD/USD Trading Tips?

Trading with AUD/USD Market Trends

Commodity prices often go through cycles, where the price keeps moving in one direction for an extended period. This makes AUDUSD more likely to have clear trends compared to other currency pairs in the forex market.

Trading During the AUDUSD’s Most Active Trading Hours

Market activities for the AUD/USD currency pair exhibit varying amounts of volumes throughout the trading day.

At 9 p.m. GMT, the Sydney session kicks off the AUD/USD trading day, boasting significant market activities because it is the trading session of its home country, Australia. Three hours after Sydney opens, the Tokyo session begins, marking the commencement of the Asian trading day and adding to the overall trading volume.

The overlap between the Sydney and Tokyo sessions usually witness an increase in trading activity, which escalates further into the London session.

The commencement of the New York session, particularly during the overlap with the London session between 12 p.m. and 4 p.m. GMT, is usually characterized by substantial trading volume. This market overlap is known to be the period of highest trading volume for the AUD/USD pair and it is characterized by significant price movements. Following the peak market activity, trading volume gradually declines as the New York session draws to a close at 8 p.m. GMT.

Monitoring AUDUSD Correlations

AUD/USD shares direct correlations with commodity prices and some financial assets which should be monitored closely. Australia's export of essential commodities like gold, wheat, and copper implies its positive correlations to these commodity prices. Therefore, an increase in the price or demand of commodities may strengthen the value of AUD against the USD, causing the currency pair, AUD/USD, to rise.

Staying Up to Date With Economic News

Staying on top of what moves the AUD/USD pair can be helpful for trading. With the Plus500 economic calendar, you can look out for upcoming events like interest rate changes, inflation reports, and political news that could affect the price movement of the AUD/USD currency pair.

To stay informed about the changing market conditions regarding AUD/USD, you can set up trading alerts to get instant updates directly on your phone or email.

Practicing Proper Risk Management

Risk management is aimed at mitigating the inherent risks associated with trading in volatile markets such as AUD/USD. One crucial aspect of risk management involves the judicious use of leverage. Additionally, implementing stop-loss orders can help traders limit losses by automatically closing positions when predetermined stop levels are reached, thus safeguarding against unexpected market movements. These risk management practices tailored to individual trading strategies, can play a pivotal role in trading volatile markets, ultimately helping traders to protect their capital and optimize their trading performance.

Conclusion

Understanding AUD/USD, a unique commodity currency in the forex market, provides valuable insights for traders. This article goes into detail to help traders learn more about AUD/USD uncovering the risks, benefits, and trading strategies that one can use to ride on the AUD/USD price movement. Alongside the comprehensive guide, it's essential to consider putting the trading tips into action as they can help enhance trading performance.

FAQs

Is AUD/USD More Volatile than the EURUSD?

Long term, the AUD/USD currency pair has recorded more volatility than EUR/USD, but in shorter time frames, EUR/USD usually has more volatility compared to AUD/USD.

What Are Some Commodity Currency Pairs Like AUDUSD?

Some currency pairs like AUD/USD include the USD/CAD and the NZD/USD. They are all influenced by commodity prices and are characterized by significant trading volumes.

Who Are the Market Participants Involved in Trading AUD/USD?

Various market participants engage in trading AUD/USD, including central banks and commercial banks, institutional investors such as hedge funds and pension funds, and retail traders involved in speculative trading activities.

How does the price of gold affect the Australian Dollar (AUD)?

As a major producer of gold, Australia's currency (AUD) usually strengthens when gold prices rise and may weaken when gold prices fall. This can offer early signals for opening trade positions on AUD before it reacts to gold price movements.

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