Considering you’ve read the previous lessons, can you predict when exactly to buy or sell a currency pair? Well, this is where concepts like fundamental and technical analysis come to play.
Let’s assume you know how the market is going to perform in the future, but, would you be able to choose the right pair and the right order (buy/sell) to place your trade? For example, let’s say you know that the US dollar is going to fall. Now, would you know if you have to execute a buy or sell on the US currency pairs? Majority of the people would say they would go for the sell. However, this is not entirely correct.
Confused? Well, let us answer all the above questions in the following topics of the lesson.
Know when to buy or sell
The best way to understand this topic is by considering a number of examples. The example sets are as follows.
Firstly, brushing up the previous lesson’s concept; in a currency pair, the left currency is called the base currency, and the right currency is called the quote currency. Also, the basis for buy/sell is determined by the base (left) currency.
If you think the US economy is going to weaken in the near future, and the US dollar exchange rate is going to depreciate, you would execute a SELL order on USD/CAD.
When you trigger a sell order on this pair, you are basically selling the US dollar and buying the Canadian dollar.
So, in the future, when the US dollar falls, you can sell the Canadian dollar and buy back the US dollar by executing a BUY order on this pair. This is order is also called as closing the positions.
However, in general, the real deal is that you are taking the opposite trade of the position you took initially.
Example 2: EUR/USD
Considering the same above situation that the US economy is going fall, and due to this the US dollar is also going to crash; would you look forward to buy the EUR/USD or would you sell it. Here is where many novices get confused though they know the future of the market.
Considering the US dollar will fall, we need to BUY the EUR/USD to make a profit out of this trade. This is because the EUR is the base currency and forms the basis for buy/sell.
In other others, when you take a buy position on EUR/USD, you are basically buying the EUR and indirectly selling the US dollar.
So, by taking a long position on this pair, you are actually in a SELL position on the US dollar. Therefore, as the dollar value decreases, you would be gaining profits. Contrarily, with respect to EUR/USD, you would be profiting from the trade when the price of the EUR/USD is rising, because the rise in EUR/USD means an increase in the value of EUR and an equivalent fall in the value of US dollar.
The role of the counter currency
In the above two examples, what do you think is the role of CAD and EUR. In the case of USD/CAD, stronger the Canadian dollar, more the profit you would be making. Similarly, in the case of EUR/USD, stronger the Euro, more the gains you would be sitting with.
In general, the counter currency must always be of the opposite trend of the currency you are focusing on.