Know when to buy or sell a currency pair

buy or sell foreign currencies

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

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

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

EUR/USD

In this example, the Euro represents the base currency and therefore the “basis” for purchase/sale.

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 US 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 therefore the “basis” for purchase/sale.

If you think the Japanese government will continue to weaken the yen to facilitate its exports, you execute a purchase order on the USD/JPY. In 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 receive 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 therefore the buy/sell “base”.

If you think that the British 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 British economy is slowing down while the US economy remains as strong as Jack Bauer, you execute a sell order on GBP/USD. Thus, you sell pounds while waiting for them to depreciate against the US dollar.

USD/CHF

In this example, the US dollar represents the base currency and therefore the “basis” for purchase/sale.

If you think the Swiss Franc is overvalued, you will execute a purchase 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 have an impact on 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 batches.

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 have (we will tell more about the lots later).

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

Yes, you can thanks to margins and leverage!

The 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, with a tiny portion of your initial capital.

Here is an explanation.

We stress the importance of this particular point!

  • You think that market signals indicate an imminent rise of the pound against the US dollar.
  • You open a position of a standard lot (100,000 units GBP/USD), buying the British pound at 2% margin and expect an increase in the exchange rate. When you buy a lot (100,000 units) of GBP/USD at a price of 1,500,000, you buy 100,000 pounds, worth 150,000 US dollars (100,000 units of GBP * 1,500,000). If the required margin was 2%, then US$3,000 would be required in your account to open the position (US$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 prove to be correct and you decide to sell. You close the position at 1.50500. You earn about 500 USD.
Your ActionsGBPUSD
You buy 100,000 pounds at an exchange rate of 1.5000 100 000150 000
The time of a eyelash beat, the GBP/USD exchange rate rises to à 1.5050 and you sell-100 000 150 500
You made a profit of 500 US dollars.0 500

When you decide to close a position, the deposit initially made is returned 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 batches. This means that you do not necessarily need to trade in a 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!

Trade roulant (Roll over)

No, it’s not about counting the minutes on your mobile phone! For any open position during your broker’s closing hours (generally 17:00 EST), there is an interest rate corresponding to a “roll over” transaction that every trader must pay on his profits according to his margin and market position.

If you do not wish to charge or pay interest, be sure to close your positions before 5:00 p.m. EST, at the “official” market close.

Since any currency exchange involves the purchase of one currency by another, rolling trade fees are an integral part of Forex trading. Interest is paid on the currency borrowed and earned on the currency purchased.

If you buy a currency at a higher interest rate than the one you are borrowing, the differential rate will be positive (e.g. USD/JPY) and you will earn a remuneration in the end.

Conversely, if the differential rate is negative then you will have to pay.

Note that many online brokers adjust their rolling trade rates according to several factors (account leverage, interbank lending rates). Please consult your broker for more information on the rates of rolling trades and their credit/debit procedure.

Here is a chart to help you represent the differential interest rates on major currencies (last updated on 09/23/2015):

Benchmark interest rates

CountryInterest rateérêt
United States0,25%
Euro zone0,05%
United Kingdom0,50%
Japan0,10%
Canada0,50%
Australia2%
New Zélande2,75%
Switzerland-0,75%

Soon, we will teach you the basics about how to use interest rate differentials to your advantage.