Almost all traders have a unique style and strategy when it comes to buying and selling currencies. In fact, as the foreign exchange market is one of the largest and most liquid markets in the world, there are many trading techniques.
Knowing when to buy and sell currencies depends on many factors, but the volume tends to be higher during times of market volatility, which is associated with increased risk. This article covers the concepts of buying and selling currencies with practical examples and provides additional resources to help you gain experience in Forex trading.
PURCHASE AND SALE OF CURRENCY: WHAT IS IT?
Buying and selling currency pairs means anticipating the appreciation or depreciation of one currency against another. Trading can therefore be based on technical analysis or fundamental analysis. Once the groundwork is laid, the trader examines other technical and fundamental aspects. They follow the entry and exit levels, without departing from its approach to risk management.
Several factors affect the price of currency pairs and can help traders determine when to buy or sell, including:
Government instability, corruption, and government reshuffling can affect a currency’s value – for example, the election of President Donald Trump caused the currency to appreciate. American dollar !
For what concern fundamental, Forex traders keep an eye on data on employment, GDP and monetary and fiscal policies (among others), which affect the value of currencies. Our economic calendar presents upcoming events that could rock the financial markets.
Technical traders tend to rely on key levels (support and resistance), trends and other indicators before placement.
Taking the currency pair EUR / USD for example, we will explain how and when to buy or sell currencies. Suppose we want to go long on the pair EUR / USD. If the EUR is valued with respect to American dollar once you started the trade, you would have made a profit (depending on the commission and other fees). In this example, the trader buys euros while selling US dollars. Let’s continue. If the long position on the EUR / USD pair was placed at 1.1300 and the price is at 1.1504 at the close of the trade, the realized profit is 204 pips. The graph below illustrates our point.
In this example, the trader relied on the following technical elements:
- Entry Point: The Morning Star, a Japanese candlestick pattern, is a potential entry point, as confirmed by the RSI indicatorwhich sends an oversold signal.
- Exit point: Key levels were used to determine the initial profit level.
Similarly, a fundamental trader could position themselves on the currency pair USD / JPY based on political and economic events. For example, if the fundamental trader expects the Fed to raise interest rates, then he assumes that this increase would attract more foreign investment to the United States and thus increase the demand for the domestic currency (USD). The trader could therefore consider going long in anticipation of an appreciation of the US dollar. Of course, this remains hypothetical, because economic theory and principles don’t always materialize in real life. Unlike long positions, going short on a currency pair is slightly more complex. Check out our article on short selling in forex to know more.
UNDERSTANDING RISK MANAGEMENT WORK IN THE FRAMEWORK OF SELLING AND BUYING POSITIONS ON FOREX
Risk management is essential for the sustainability of the Forex trader. It is not just a relationship risk / reward positive, but also to understand any fluctuations in volatility. Factors affecting currency prices can sometimes have significant repercussions. It is therefore possible to manage the prevention of negative effects on your trade by implementing adequate risk management techniques. Buying and selling currencies can be complex, so it is essential to understand how it works, such as how to interpret quotes, before starting a trade. We also recommend that you consult our Beginner’s guide to forex trading to benefit from accelerated Forex trading training.
ADDITIONAL READING AND TOOLS TO EXPAND YOUR FOREX TRADING KNOWLEDGE
- Our research team analyzed over 30 million live trades to find out the characteristics of a successful trader. Incorporate these features to gain market advantage.
- Traders often take a look at the sentiment of clients when trading on the forex market. DailyFX provides you with this data, which they rely on IG customer sentiment.
- The forex market has evolved over the centuries. To benefit from a summary of the main developments that have shaped this market with $ 5 trillion in daily trading, check out our article on history of forex.