Knowing when to buy or sell a currency pair is the key to succeeding as a trader.
Forex trading involves trying to predict which currency will rise or fall versus another currency.
How do you know when the timing is right to buy or sell a currency pair?
In the following examples, we are going to use a little fundamental analysis to help us decide whether to buy or sell a specific currency pair.
The supply and demand for a currency change due to various economic factors, which drives currency exchange rates up and down.
Each currency belongs to a country (or region). So forex fundamental analysis focuses on the overall state of the country’s economy. Things such as productivity, employment, manufacturing, international trade, and interest rates impact a country’s economic outlook.
EUR/USD
In this example, the euro is the base currency and thus the “basis” for the buy/sell.
If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, you would execute a BUY EUR/USD order.
By doing so, you have bought euros with the expectation that it will rise versus the U.S. dollar.
If you believe that the U.S. economy is strong and the euro will weaken against the U.S. dollar, you would execute a SELL EUR/USD order.
By doing so, you have sold euros with the expectation that it will fall versus the US dollar.
USD/JPY
In this example, the U.S. dollar is the base currency and thus the “basis” for the buy/sell.
If you think 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 with the expectation that it 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. Then, you would execute a SELL USD/JPY order.
By doing so you have sold U.S dollars with the expectation that it will depreciate against the Japanese yen.
