The Bid, Ask and Spread
Trading In Lots & Margin Trading Explained
You know now that forex trading is basically people or institutes trying to predict which currency will rise or fall in value compared to another.
But how do you know when to buy or sell a currency pair?
Basic of Fundamental Analysis
In this lesson, we will go over some different examples and we are going to use the basics of fundamental analysis to help us decide whether we should buy or sell a specific currency pair.
The supply and demand of currencies change due to various economic factors, which drives currency exchange rates up and down.
This may be a new concept to you, so please take your time to learn and understand the basics of fundamental analysis. Using fundamental analysis, traders are able to make informed trading decisions based on the overall state of the relevant country’s economy.
If you were interested in trading EUR/USD, you would base your fundamental analysis on the overall state of the United States (USD) economy and the economy of the countries that make up the European Union (EUR).
Economic factors to consider:
- International trade
- Interest rates
- Gross domestic product (GDP) & Economic Growth
- Monetary Policy
We are just going to cover the very basics of what fundamental analysis is and how to apply it. We will not be going to in depth analysing the various economic factors just yet.
In this example, your base currency is the euro and will therefore be the “basis” for the buy/sell.
After analysing the various economic factors, if you believe that the U.S. economy will weaken, which would cause the U.S. dollar to lose value, then you would execute a BUY EUR/USD order.
Or open a “Long” position.
In this case, you just bought euros (EUR) with the expectation that it will increase in value versus the U.S. dollar (USD).
If, after you analyse the various economic factors and come to the conclusion that the U.S. economy is too strong and that the euro will decrease in value (depreciate) versus the U.S dollar, you would execute a SELL EUR/USD order.
Or open a “Short” position.
In this case, you would have just sold euros with the expectation that it will decrease in value versus the U.S. dollar
In this example, your base currency is the U.S. dollar (USD) and is therefore the “basis” for the buy/sell.
If you believe that the price of the Swiss franc is unjustified, you would execute a BUY USD/CHF order.
When you execute a buy order for USD/CHF, you are buying dollars with the expectation that it will increase (appreciate) in value versus the Swiss Franc.
If after you do your research, you come to a conclusion that the weakness in the U.S. housing market will hurt future economic growth, which will weaken the dollar. You would execute a SELL USD/CHF order.
In this case, you would have sold U.S. dollars with the expectation that it will decrease in value (depreciate) versus the Swiss franc.
Read more about understanding currency pairs