Know when to buy or sell a currency pair

In the examples that follow, we will use fundamental analysis to help us choose between buying or selling a specific currency pair.

If you’ve skipped your economics class, don’t worry! We will do a fundamental analysis course in the following lessons.

But now, let’s assume you know what we’re going to talk about…

EUR/USD
In this example, the Euro represents the base currency and thus the buy/sell “basis”.

If you think the US economy will continue to weaken, you execute a buy order on the EUR/USD. By doing so, you buy euros in the expectation that they will strengthen against the U.S. dollars.

If you think the US economy is strong, you execute a sell order on the EUR/USD. By doing so, you sell euros in the expectation that they will weaken against the US dollars.

USD/JPY
In this example, the US dollar represents the base currency and thus the buy/sell “basis”.

If you think the Japanese government will continue to weaken the yen to facilitate its exports, you execute a buy order on the USD/JPY. By doing so, you buy US dollars in the expectation that they will strengthen against the Japanese yen.

If you think Japanese investors are withdrawing capital from the US financial markets and converting their currencies back into yen in order to hit the US dollar, you execute a sell order on the USD/JPY. By doing so, you sell US dollars in the expectation that they will weaken against the Japanese yen.

GBP/USD
In this example, the pound represents the base currency and thus the buy/sell “basis”.

If you think the UK economy will continue to outperform the US in terms of economic growth, you execute a buy order on GBP/USD. In doing so, you bought pounds in the hope that they will strengthen against the US dollar.

If you think the UK economy is slowing while the US economy remains as strong as Jack Bauer, you execute a sell order on GBP/USD. So you sell pounds until they depreciate against the US dollar.

USD/CHF
In this example, the US dollar represents the base currency and thus the buy/sell “basis”.

If you think the Swiss Franc is overvalued, you will execute a buy order on USD/CHF. Thus, you will have bought US dollars in order to strengthen them against the Swiss Franc.

If you believe that the US real estate market is weakening and will impact economic growth, you will execute a sell order on UD/JPY. In this way, you will have sold US dollars in the hope that it will depreciate against the Swiss Franc.

Trading margin
When you go to the market to buy an egg, you can’t buy just one they are usually sold by the “dozen” or in lots.

On Forex, it would be ridiculous to buy or sell only one euro since they trade in “lots” of 1000 units (Micro), 10 000 units (Mini), or 100 000 units (Standard) depending on your broker and the type of account you own (we’ll tell more about lots later).

“But I don’t have enough money to buy 10,000 euros! Can I still trade?”

Yes, you can with margins and leverage!

Trading margin is the term used when trading with borrowed capital. This allows you to open positions of $1,250 or $50,000 with a minimum capital of $25 to $1,000. You can initiate large transactions quickly and without excessive fees, using a tiny portion of your initial capital.

Here is an explanation.

We emphasize the importance of this point!

You think the market signals indicate an imminent rise in the pound against the U.S. dollar.
You open a standard lot position (GBP/USD 100,000 units), buy the UK pound at 2% margin and wait for the exchange rate to rise. When you buy a lot (100 000 units) of GBP/USD at a price of 1.50000, you buy 100 000 pounds, worth 150 000 US dollars (100 000 units of GBP * 1.50000). If the margin required was 2%, then USD 3,000 would be required on your account to open the position (USD 150,000 * 2%). You therefore control 100,000 with just 3,000 USD. We will discuss the margin later but you now have a brief overview of how it works.
Your predictions turn out to be correct and you decide to sell. You close the position at 1.50500. You win about 500 USD.

When you decide to close a position, the deposit initially made returns to you with a calculation of your gains or losses.

These profits or losses are then credited to your account.

The advantage of developing domestic Forex trading is that some brokers allow traders to customize their lots. This means that you do not necessarily need to trade in Micro, Mini or Standard account! If 1,542 is your preferred number and represents the number of units you want to trade, you can do it!

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