Know When to Buy or Sell a Currency Pair

Forex trading entails attempting to forecast which currency will rise or fall in value in relation to another currency.

When should you purchase or sell a currency pair？

In the following cases, we will utilise fundamental analysis to determine whether to buy or sell a specific currency pair.

The supply and demand for a currency fluctuates owing to a variety of economic factors, causing currency exchange rates to rise and fall.

Each currency is associated with a certain country (or region). As a result, forex fundamental analysis focuses on the entire status of the country's economy, such as productivity, employment, manufacturing, international trade, and interest rates。

Get up!

Don't worry if you constantly fell asleep in economics class or simply skipped economics class!

In a subsequent session, we will go over fundamental analysis.

But for the time being, pretend you know what's going on...

EUR/USD

The euro is the base currency in this case, and thus the “basis” for the buy/sell.

If you anticipate the US economy will continue to deteriorate, which is terrible for the US currency, you would place a BUY EUR/USD order.

By doing so, you have purchased euros with the assumption that they will appreciate in value relative to the US dollar.

If you believe that the US economy is robust and that the euro would fall in value versus the US dollar, you would place a SELL EUR/USD order.

You have sold euros with the anticipation that they will fall in value against the US dollar.

USD/JPY

The US dollar is the base currency in this case, and thus the “basis” for the buy/sell.

If you believe the Japanese government would lower the yen to benefit its export economy, you would place a BUY USD/JPY order.

You have purchased US dollars with the hope that they will appreciate in value against the Japanese yen.

If you believe that Japanese investors are withdrawing money from US financial markets and changing all of their US dollars back to yen, which will harm the US dollar, you would place a SELL USD/JPY order.

You have sold US dollars with the anticipation that they will fall in value versus the Japanese yen.

GBP/USD

The pound is the base currency in this example, and hence the “basis” for the buy/sell.

If you believe the British economy would continue to outperform the US economy in terms of economic growth, you would place a BUY GBP/USD order.

You have purchased pounds with the idea that they will appreciate in value against the US dollar.

If, like Chuck Norris, you believe the British economy is faltering but the American economy is strong, you would place a SELL GBP/USD order.

You sold pounds with the idea that they would fall in value versus the US dollar.

How to trade forex with USD/CHF

The US dollar is the base currency in this case, and thus the “basis” for the buy/sell.

If you believe the Swiss currency is overvalued, place a BUY USD/CHF order.

You have purchased US dollars on the expectation that they will appreciate against the Swiss franc.

If you believe that the weakening of the US housing market will harm future economic development, which will weaken the currency, you would place a SELL USD/CHF trade.

You have sold US dollars in the belief that they will devalue against the Swiss franc.

Trading in “Lots”

When you go to the supermarket to buy an egg, you can't just buy one; they come in dozens or “lots” of 12.

It would be equally dumb to purchase or sell 1 euro in forex, thus they normally come in “lots” of 1,000 units of currency (micro lot), 10,000 units (mini lot), or 100,000 units (standard lot), depending on your broker and account type (more on “lots” below).

Margin Trading

“But I don't have the funds to buy 10,000 euros!” “Am I still able to trade？”

You certainly can! By utilising leverage.

You wouldn't have to pay the 10,000 euros up front if you traded using leverage. Instead, you would make a tiny “deposit,” known as margin.

The ratio of transaction size (“position size”) to actual cash (“trading capital”) utilised for margin is referred to as leverage.

For example, 50:1 leverage, often known as a 2% margin requirement, means that $2,000 of margin is required to establish a $100,000 account.

Margin trading allows you to open significant positions with a fraction of the capital you'd ordinarily require.

This is how you can open positions for $1,250 or $50,000 with as little as $25 or $1,000.

With a minimal amount of starting capital, you can perform relatively big trades.

Allow us to clarify.

We'll go over margin in more detail later, but hopefully you've gotten a general concept of how it works.

Pay close attention since this is critical!

• You sense that marketplace symptoms and symptoms suggest that the British pound will upward push as opposed to the United States dollar.

• You open one ordinary lot (100,000 units GBP/USD), buying using the British pound and requiring a 2% margin.

• You sit back and wait for the exchange rate to rise.

• If you purchase one lot (100,000 gadgets) of GBP/USD at 1.50000, you're buying 100,000 pounds, that is worth $150,000 (100,000 gadgets of GBP * 1.50000).

• If the margin requirement changed into 2%, you will want to set apart US$3,000 on your account to open the trade ($150,000 * 2%).

•With just $3,000, you now have control of 100,000 pounds.

• Your forecasts come true, and you're making the choice to sell. You near the alternate at 1.50500. You make around $500.

When you choose to shut a position, the preliminary deposit (“margin”) is lower back to you, and your profits or losses are calculated. This income or loss is then recorded on your account. Let`s move over the GBP/USD exchange instance again.

• The GBP/USD exchange rate increased by only half a penny! Not even a shilling. It was only half a penny!

• But you earned $500!

• While you're having a power snooze!

• How？ Because you weren't trading a single pound.

• If your position size was £1, you would have earned only half a penny.

• But...whilst you opened the transaction, your role length was £100,000 (or $150,000).

•What's cool is that you weren't required to put up the complete amount.

•The only thing needed to open the deal was $3,000 in margin.

• A $500 profit on a $3,000 investment equals a 16.67% return!

• In only twenty minutes!

• That is the strength of leveraged trading!

A tiny margin deposit might result in significant losses as well as gains.

It also means that a very modest change might result in a proportionately much larger shift in the extent of any loss or profit, which can work both for and against you.

You might have easily LOST $500 in the same twenty minutes.

You wouldn't have awoken from a dream. You would have awoken in a nightmare!

High leverage sounds fantastic, but it can be lethal.

For example, suppose you start a forex trading account with a $1,000 deposit. Because your broker provides 100:1 leverage, you open a $100,000 EUR/USD position.

A 100-pip move will bring your account to $0! A 100-pip move is the same as €1! You blew your account with an one euro price change. Congrats.

When trading on margin, it‘s important to be aware that your risk is based on the full value of your position size. You can quickly blow your account if you don’t understand how margin works. We want you to AVOID this. Due to this danger, we dedicate an entire section on how margin trading works, called Margin Trading 101.

Rollover

There is a daily “rollover fee,” every now and then referred to as a “switch fee,” for positions open at your broking`s “cut-off time” (generally 5:00 pm ET), that a dealer both will pay or earns, relying at the positions you've got open. If you do now no longer want to earn or pay hobby for your holdings, absolutely make sure that they're all closed earlier than 5:00 p.m. ET, the marketplace day's set finish. Interest rollover expenses are a detail of foreign exchange buying and selling due to the fact each forex deal consists of borrowing one forex to shop for another. The borrowed forex is concern to hobby payments. On the only this is purchased, hobby is EARNED. If you purchase a forex with a better hobby fee than the only you borrow, the internet hobby fee differential might be positive (i.e. USD/JPY) and you may earn income. If the hobby fee disparity is negative, you'll should pay.

For more information on how a rollover works, check out our Forexpedia page on rollover.

It must be cited that many retail foreign exchange agents range their rollover prices primarily based totally on quite a few criteria (e.g., account leverage, interbank lending prices).

Please touch your broking for information on their unique rollover prices and crediting/debiting procedures. Here's a desk to help you discover the main currencies'

Benchmark Interest Rates

Later on, we'll teach you how to take advantage of interest rate differentials.