If you want to succeed in forex, you need to consider it a business but not gambling. However, forex is the riskiest business in the world. If you know when to buy or sell a currency pair, this business could also generate huge revenue.
In forex trading, you have to anticipate which foreign currency will appreciate or depreciate against another. If your prediction proves right, then you will make a profit. And if your prediction goes wrong, then you will end up losing.
Currency rate changes for various reasons. Although supply and demand change currency rates, this supply and demand rely on fundamental factors such as economic condition, interest rate, geopolitical condition, unemployment rate, and so on.
Technical factors just follow the footprints of the fundamental analysis. Today I will cover everything from fundamental analysis to technical analysis lucidly so you can better understand when to buy or sell a currency pair.
Practical example on GBP/USD
Suppose you make a deep-down analysis of England’s economy. You find that the economy of England is fragile at this time. After new prime minister Boris Johnson got elected, the unemployment rate rose. And some other fundamental factors also show that the British pound is weak now.
Then you take the help of your technical analysis tools .you technical analysis also points out that sterling is losing its strength.
On the contrary, Joe Biden, president of America, made America great again. The US economy is stronger than any other time in the past. All the economic index is in rising mode.us dollar is super strong right now.
So you decide to sell pounds against the US dollars. If your prediction goes right then, GBPUSD will fall soon, and you will make money.
Similarly, if your analysis shows you that the pound will become strong against the US dollar soon, you place a buy order in the GBPUSD pair.
Another example of EUR/JPY
Here base currency is the euro, and the quote currency is the Japanese yen. If you think that the Japanese currency yen will weaken and the EURO will rise against the yen, you should buy U.S euros against the Japanese yen. So here, you will place a buy order in the EUR/JPY currency pair.
But if your analysis points out that the big boys of japan are taking money out from European financial markets and Japanese investors switching all their euros back to yen, then you should place a sell order in EUR/JPY pair. In this way, you are selling euros against the yen, expecting that the European currency’s value will fall against the Japanese currency.
How to trade forex with EUR/USD
In this example, the euro is the base currency, and USD is the quote currency. If you strongly believe that economic growth and some other economic index of the European economy will continue to do better than the U.S, then you should buy euros expecting the euro will appreciate against the U.S dollar. So here you shoot a EUR/USD buy order. But if you think the U.S economy is getting strong while the European economy is slowing down, then you anticipate euros will depreciate against U.S dollars. Here you can execute a EUR/USD sell order.
when to buy or sell a currency pair, USD/CHF
In the USD/CHF pair, USD is the base currency. If you have data that Switzerland’s government will intervene swiss national bank (SNB) and thus overrate the Swiss franc, you should place a buy order in USD/CHF pair.
It means you are buying U.S dollars expecting the U.S dollar will appreciate against the Swiss franc. But if you have data that U.S land residence property market weakness will directly affect U.S economic growth soon, resulting in dollar depreciation, then you should execute a sell order in USD/CHF pair. Here you are selling USD against the Swiss franc.
What is margin trading and leverage, and how to use them in trading forex
Suppose you open a trading account, and you wish to buy 10,000 pounds. But the irony of the fact is that you don’t have enough money to buy that many amounts of pounds. So how do you do now? Here comes the concept of leverage. If you trade with the help of leverage, you don’t need to pay the full amount to buy 10,000 pounds. Instead, you deposit a partial amount in your account, which is known as margin. Your leverage will make up the rest.
Suppose when you open an account, you select your leverage as 50:1. This means you need a 2% margin .more precisely; only 2000 dollars is needed to extend $100,000 worth of positions. You can easily execute significant transactions with small amounts using leverage. You may often see forex brokers offer you or let you trade with as low a balance as $5o or $ 100. Have you ever questioned yourself how they do this? This is actually the charisma of leverage and margin trading.
Example of margin trading and leverage with AUD/USD pair
When to buy or sell a currency pair with example
You have data about the Australian dollar that the Australian dollar will be strong against the U.S. dollar. So fundamentally, you are planning to long the Australian dollar. Then you take the help of some technical tools. Your technical analysis also points out that the AUD/USD pair is in a bullish mood.
You analyze the sentiment of the foreign exchange market. You find out that investor and trader sentiment is in a buying mood. So when all your technical fundamental and sentimental analysis tells you is the long Australian dollar against the U.S. dollar. Then you open a standard lot of 100,000 units of AUD/USD at the price of 0.7223, where your margin requirement is 2%. Here you are buying 100,000 Aussie, which is worth $72,230.
As your margin requirement is 2%, you need only 2,166.90 or approximately 2167 dollar Dollars in your account to open such a prominent position of $72,230 Now, if your analysis becomes right, then the AUD/USD pair will rise. When the AUD/USD currency price increases from your buying price, you are in floating profit, and you decide to book your profit. you close your position at 0.73000 in profit. How much profit do you make? Look at the picture below, and you will better understand your profit calculations.
So when you close your position, your initial deposit or margin comes to your account plus another 770 dollars added to your account, which is your profit. Now when you take a look at your profit, you get astonished. How 770 dollars profit you make with only depositing 2167 dollars! How does this happen, and how is this possible? This thing is only possible when you take advantage of leverage. Just taking advantage of leverage, you are now controlling 100,000 Aussie accounts.
Now I will show you the other side of the coin. If you make a huge profit within a short span of time, you can also make a huge loss! Yes. If you use high leverage, then when your prediction goes right, you make a profit, but you can also make a huge loss if your prediction goes lost. Suppose if your prediction goes wrong in the above example I gave above, then your loss would be 770 dollars. That means one-third of your account will be vanished just for using high leverage. Of course, margin trading and high leverage are fantastic, but sometimes it turns into a nightmare for your trading account.
What is “lot” in trading
Suppose your mother sends you to a super shop and tells you to buy some bananas. Then what will you do? You buy them in dozens. Here for buying bananas, we use dozens. Similarly, in the forex market for the buy and sell procedure, we use “lot.” In the banana market, the one dozens symbolize 12 units, and in the financial market, one lot symbolizes 1,000 units.
Here in fore market 1,000 units = micro lot
10,000 = mini lot
100,000 = standard lot
Interest rates matter in the forex market
If you ask the most crucial factor that influences the forex market, then that would be interest rates. You need to understand interest rates properly before understanding when to buy or sell a currency pair. Different central banks have different interest rates.
Changing interest rates may affect directly on other economic factors. Sometimes we observe the market gets highly volatile and acts like mad. A currency may fall like hell or fly like a rocket. Why does this happen? It happens because of the changes in interest rates. The effects of changing the interest rate can be seen through the weak or month.
And if you can understand and master how to predict and respond to these interest rates changes’ effects and cope with these volatile movements, you can also produce a massive profit from the market. If you are a day trader and swing trader, understanding interest rates top to bottom is mandatory. Forex day traders and swing traders always wish to buy major currencies with high-interest rates.
Any news release from central banks on interest rate changes should be viewed carefully. The monetary policy of any country is controlled by the board of directors of that country’s central banks. As a forex trader, we may hear an interest rate hike and interest rate cut many times. But actually, What are the interest rate hike and interest rate cuts?
If it is much needed to restrain any country’s inflation, then the central bank will hike the interest rate. If deflation happens and is necessary to add money to any country’s economy, then the central bank will cut exchange rates. There are many economic factors, but the most commons are
The consumer price index
Consumer spending
Land and housing market data
Unemployment rates
Interest rates of different countries & currency symbol
| country | Current interest rate | currency | Central bank |
| United States | 0.00%-0.25% | USD | Federal Reserve System |
| eurozone | 0.00% | EUR | European Central Bank |
| United kingdom | 0.10% | GBP | Bank of England |
| japan | -0.10% | JPY | Bank of Japan |
| Canada | 0.25% | CAD ( Canadian dollar) | Bank of Canada |
| Australia | 0.10% | AUD | Reserve Bank of Australia |
| New Zealand | 0.25% | NZD | Reserve Bank of New Zealand |
| Switzerland | -0.75% | CHF | Swiss National Bank |
| brazil | 2.00% | Brazilian real | Banco Central do Brasil |
| china | 4.35% | Renminbi | People’s Bank of China |
| Denmark | 0.05% | Danish krone | Danmarks Nationalbank |
| hungary | 0.75% | Hungarian forint | Magyar Nemzeti Bank |
| iceland | 1.00% | Icelandic króna | Central Bank of Iceland |
| India | 4.25% | Indian rupee | Reserve Bank of India |
| Indonesia | 4.00% | Indonesian rupiah | Bank of Indonesia |
| Iraq | 4.00% | Iraqi dinar | Central Bank of Iraq |
| Israel | 0.10% | Israeli new shekel | Bank of Israel |
| Malaysia | 1.75% | Malaysian ringgit | Central Bank of Malaysia |
| Mexico | 4.25% | Mexican peso | Bank of Mexico |
Forex trading strategy based on interest rate decision
You may decide to trade the result of the interest rate news release. If you choose to do so, you have to buy or sell currencies when news releases.
Some more advanced forex traders may try to forecast the central bank’s speech. As a currency trader, if you wish to trade the news, you need to monitor many variables like inflation and deflation rate. It would be best if you placed a trade before the central bank’s speeches.
Another popular method in the largest market is to let the move happen first, which is the effect of the interest rate result. Then wait patiently for a pullback on that particular currency pair.
