When to Buy or Sell a Currency Pair?
Forex trading involves trying to predict which currency will rise or fall versus another currency. How do you know when to buy or sell a currency pair? In the following examples, we are going to use a little fundamental analysis to help us decide whether to buy or sell a specific currency pair. The supply and demand for a currency change due to various economic factors, which drive currency exchange rates up and down. Each currency belongs to a country (or region). So forex fundamental analysis focuses on the overall state of the country’s economy, such as productivity, employment, manufacturing, international trade, and interest rates.
Lot size – When you go to the grocery store and want to buy an egg, you can’t just buy a single egg, they come in dozens or “lots” of 12. In forex, it would be just as foolish to buy or sell 1 euro, so they usually come in “lots” of 1,000 units of currency (micro lot), 10,000 units (mini lot), or 100,000 units (standard lot) depending on your broker and the type of account you have (more on “lots” later).
Leverage – When you don’t have enough balance to buy 10000 Euros – You can! By using leverage.
When you trade with leverage, you wouldn’t need to pay the 10,000 euros upfront. Instead, you’d put down a small “deposit”, Leverage is the ratio of the transaction size (“position size”) to the actual cash (“trading capital”) used for margin.
-For example, 1:100 leverage, means $2,000 of the account balance is enough to open a position size worth $200,000.
A small deposit can lead to large losses as well as gains- If not used properly. It also means that a relatively small movement can lead to a proportionately much larger movement in the size of any loss or profit which can work against you as well as for you.
Pips – You’ve probably heard of the term “pips”
A pip is usually the last decimal place of a price quote, or in other words – the smallest price movement on the market.
Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).