Know When to Buy or Sell a Currency Pair

0

When you go to the grocery store and want to buy an egg, you aren’t able to just buy a single egg. You have to buy a dozen.

In Forex, it would be just as silly to buy or sell 1 euro, so they generally come in “lots” of 1,000 units of currency (Micro), 10,000 units (Mini), or 100,000 units (Standard) based on your broker and your account type (more on “lots” later).

What if you don’t have enough money to buy 10,000 unite or 100,000 units? Yes you can with margin trading!

Margin trading simply means you are trading with borrowed capital. This is how you can open $1,250 or $50,000 positions with as little as $25 or $1,000. You can carry out fairly large transactions, very quickly and cheaply, with a small amount of initial capital. Let’s explain

EUR/USD

Trading euro

For this example, we will assume the euro is the base currency and therefore the reason for the buy/sell.

If you believed that the US Economy will continue to weaken, which is bad for the U.S. dollar, then you would execute a BUY EUR/USD order. By doing so, you have bought Euros expecting that they will rise versus the U.S. dollar rising.

On the other hand if you believed that the U.S. economy was strong and the euro was going to weaken against the U.S. dollar then you would execute a SELL EUR/USD order. So you have sold euros expecting that they will fall versus the US dollar.

USD/JPY

Trading dollar

For this example, the U.S. dollar is the base currency and therefore the reason for the buy/sell.

If you believed that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars expecting that they will rise versus the Japanese yen.

If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to yen, and this will hurt the U.S. dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars expecting that they will depreciate against the Japanese yen.

GBP/USD

Trading pound

For this example, the pound is the base currency and therefore the reason for the buy/sell.

If you believed the British economy will continue to do better than the U.S. in terms of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds expecting that they will rise versus the U.S. dollar.

If you believe the British’s economy is slowing while the United States’ economy remains strong like Jack Bauer, you would execute a SELL GBP/USD order. By doing so you have sold pounds expecting that they will depreciate against the U.S. dollar.

USD/CHF

Trading franc

If you believed the U.S. dollar is the base currency and thus the “basis” for the buy/sell.

If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought U.S. dollars expecting that they will appreciate versus the Swiss Franc.

If you believe that the U.S. housing market weakness will hurt future economic growth, which will weaken the dollar, you would execute a SELL USD/CHF order. By doing so you have sold U.S. dollars expecting that they will depreciate against the Swiss fran.

Leave A Reply