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Course 201 – Know When To Buy Or Sell A Currency Pair

In this lesson, we’ll be using fundamental analysis to determine when to buy and when to sell a currency pair.

For starters, note that each currency belongs to a particular country or region. In forex trading, sale is determined through fundamental analysis which focuses on factors like the region’s overall economic state, which includes employment, manufacturing, productivity, interest rates, and international trade.

Below are examples, though not entirely of major currency pairs.

 

EUR/NGN

Here, the euro determines buying or selling, as it is the base currency.

If the trends in the Nigerian economy makes you believe that it will continue to weaken, which is bad for the Nigerian Naira, you would execute a BUY EUR/NGN order.

By doing so, you have bought euros in the expectation that they will rise against the Nigerian Naira.

But if you think that the Nigerian economy is strong and the euro will weaken against the Nigerian Naira, you would execute a SELL EUR/NGN order.

By doing so, you have sold euros in the expectation that they will fall against the Nigerian Naira.

USD/CNY

In this case, the U.S. dollar is the base currency and thus the determinant for the buy or sell.

If you can predict that the Chinese government is going to weaken the yuan in order to help its export industry, you would execute a BUY USD/CNY order.

By doing so you have bought U.S dollars in the expectation that they will rise against the Chinese Yuan.

If you believe that Chinese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to yuan, and this will hurt the U.S. dollar, you would execute a SELL USD/CNY order.

By doing so you have sold U.S dollars in the expectation that they will depreciate against the Chinese yuan.

GBP/USD

In this example, the pound is the base currency and thus the “basis” for the buy/sell.

If you think 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 in the expectation that they will rise against the U.S. dollar.

If you believe the British economy is slowing while the American economy remains, you would execute a SELL GBP/USD order.

By doing so you have sold pounds in the expectation that they will depreciate against the U.S. dollar.

USD/CAD

In this example, the U.S. dollar is the base currency and thus the “basis” for the buy/sell.

If you think the Canadian dollar is overvalued, you would execute a BUY USD/CAD order.

By doing so you have bought U.S. dollars in the expectation that they will appreciate against the Canadian dollar.

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/CAD order.

By doing so you have sold U.S. dollars in the expectation that they will depreciate against the Canadian dollar.

Margin Trading

Just as it’s more convenient to purchase certain goods in bulk rather than in small portions, in forex, it would mean being penny wise and pound foolish to buy or sell 1 usd, so they are sold in trade sizes called “lots”. There is the standard lot (100,000 units of currency), mini (10,000 units) and micro, (1,000 units), depending on your broker and the type of account you have.

Not to worry, with margin trading you can still trade even if you don’t have enough money to buy 10,000 USD.

In simple terms, margin trading makes it possible to trade with borrowed capital, in other words, you can open $1,500 or $50,000 positions with as little as $30 or $1,000.

It gets really easy to speedily run relatively large transactions, at a cheap rate with a small amount of initial capital.

Let us explain.

Listen carefully because this is very important!

  1. You can decipher that signals in the market are indicating that the British pound will go up against the U.S. dollar.
  2. You open one standard lot (100,000 units GBP/USD), buying with the British pound at 2% margin and wait for the exchange rate to climb. When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).If the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade (US$150,000 * 2%). You now control 100,000 pounds with just US$3,000. Hope you’ve been able to get the basic idea of how it works.
  3. Your predictions come true and you decide to sell. You close the position at 1.50500. You earn about $500.
Your Actions GBP USD
You buy 100,000 pounds at the exchange rate of 1.5000 +100,000 -150,000
You blink for two seconds and the GBP/USD exchange rates rises to 1.5050 and you sell. -100,000 +150,500
You have earned a profit of $500. 0 +500

 

On closing a position, your original deposit is returned to you and a calculation of your profits or losses is done and then credited to your account.

Good news is with the innovation of retail forex trading, there are some brokers who allow traders to have custom lots. Custom lots make it possible for you to trade with your custom number of units, in other words, you don’t need to trade in micro, mini or standard lots!

ROLLOVER

In forex trading, there are interest rates that are either earned or paid by traders depending on your established margin and position in the market. These occurs when there are positions still open after 5:00 pm EST which is also 10 pm WAT which is the stipulated time for forex trading to be closed daily. In order to avoid paying or earning interest on your positions, all you need to do is make sure your positions are closed before 5:00pm EST or 10 pm WAT .

Forex trading can be explained as borrowing one currency to buy another, it therefore attracts interest rollover charges.

Interest is PAID on the currency that is borrowed.

Interest is EARNED on the currency that is bought.

If you are purchasing a currency with a higher interest rate than the one you are borrowing, then the net interest rate differential will be positive (i.e. USD/CNY) and you will earn interest as a result.

On the other hand, if the interest rate differential is negative then you will have to pay.

Note that many retail brokers adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates), it is therefore important that you enquire with your broker for more information on rollover rates and crediting/debiting procedures.

Below is a tablewith the most current interest rate differentials of the major currencies. The NGN is not among the major currencies, it’s just an additional information.

BENCHMARK INTEREST RATES

Country

Interest Rate

United States

≤2.500%

Eurozone

0.00%

United Kingdom

0.750%

Japan

-0.100%

Canada

1.750%

Australia

1.000%

New Zealand

1.500%

Switzerland

-0.750%

Nigeria

13.5%

 

With time, you will be learning how to use interest rate differentials to your advantage.

 


We advise you to open a Demo account for the purpose of this phase of learning.

Click on this LINK to create an FXTM Demo or Live Trading account >>> OPEN ACCOUNT

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