June 03, 2022 - 10:32 AM 440 views
Typically, forex market trading (FX) involves forecasting which currency will rise or fall against another currency.
But, how do you know when to purchase or sell a currency pair?
In the forthcoming examples, we would like to use basic analysis to further decide which particular currency pair to buy or sell.
The supply and demand of the currency variations are totally dependent on the different economic factors that can direct currency exchange rates up and down.
Each currency belongs to a specified country or region. So, our forex market’s basic analysis depends on the overall state of the country’s economic outlook. It can be employment, manufacturing, international trade, productivity, geopolitical tensions, interest rates, etc.
In the given example, the EURO is the base currency, and thus it forms the basis for the buy and sell.
If you trust that the US economy is falling, then it would be a bad signal for the US dollar. Then you can purchase the EUR/USD currency pair.
You have purchased Euros on the hope of an increase in the value of the currency against the US dollar.
You would place a Sell EUR/USD order if you feel the US economy is robust and the Euro will decline versus the US dollar.
You have sold Euros with the anticipation that they will fall in value against the US dollar.
The US dollar is the base currency in this case, and thus the "basis" for the buy/sell.
You would place a buy USD/JPY trade if you believe that the Japanese government will weaken the yen in order to boost the country's export business.
By doing so, you have purchased the US dollars with the expectation of an increase in the value of the US dollar against the Japanese yen.
You would place a Sell USD/JPY order if you believe Japanese investors are withdrawing money from the US financial markets and changing all of their US dollars back to yen, which will harm the US currency.
You have sold US dollars with the assumption that they will devalue against the Japanese yen as a result of your actions.
The pound is the base currency in this case, and thus the "basis" for the buy/sell.
You could place a BUY order for GBP/USD pair if you believe that the British economy is performing better than the United States of America (USA) in terms of economic and fiscal growth.
By doing so, you have purchased the pounds with the expectation of an increase in the value of the US dollar against the British Pound.
You could place a SELL order for GBP/USD pair if you believe that the British economy is slowly falling when compared to the United States of America (USA) economy which remains strong like Chuck Norris.
As a result of your actions, you have sold British pounds with the assumption that it will devalue against the US dollars.
In this case, the US dollar is the base currency, and thus the "basis" for the buy/sell.
If you believe that the Swiss Franc (CHF) is overestimated, then you would place a BUY order for USD/CHF order.
By doing so, you have purchased US dollars in the assumption that it will get high over Swiss Franc (CHF) currency.
If you think that the US housing market weakness will damage the US economic growth, this can depress the US dollar then you can execute the SELL order for USD/CHF currency pair.
By doing so, you have sold the US dollars with the assumption that it will devalue against the Swiss Franc currency.
Because buying or selling one Euro in forex would be silly, they are normally sold in "lots" of 1,000 units (micro lot), 10,000 units (mini lot), or 100,000 units (standard lot), depending on your broker and account type (more on "lots" later).
"However, I don't have the funds to purchase 10,000 euros!" Is it still possible for me to trade?"
Yes, you can! By making use of leverage.
You won't have to pay the 10,000 Euros up front if you trade with leverage. Instead, you'd make a tiny "deposit," referred to as margin.
The ratio of transaction size ("position size") to actual cash ("trading capital") utilized for margin is known as leverage.
For example, a 50:1 leverage ratio often referred as a 2% margin requirement means that $2,000 in margin is required to establish a $100,000 position.
Margin trading allows you to open significant positions with a fraction of the capital you'd need otherwise.
This is how you can open positions for $1,250 or $50,000 with as little as $25 or $1,000.
With a small amount of beginning capital, you can perform relatively big trades.
Allow me to explain.
We'll go over margin in further detail later, but ideally you now have a good understanding of how it works.
When you elect to close a position, you will receive your initial deposit ("margin") back along with an estimate of your gains or losses.
After that, your profit or loss is credited to your account.
Let's take a look at the GBP/USD trade example from earlier.
However, when you first opened the transaction, your position size was £100,000 (or $150,000).
That’s the power of authoritative trading!
A tiny margin deposit might result in significant losses as well as profits.
It also means that a relatively minor change in the size of any loss or profit might result in a proportionately much larger change in the size of any loss or profit, which can work both for and against you.
You might have easily LOST $500 in the same amount of time.
You wouldn't have awoken from your slumber. You'd have awoken in the middle of a nightmare!
High leverage may sound appealing, but it can be dangerous.
You open a forex trading account with a $1,000 deposit, for example. You open a $100,000 EUR/USD position because your broker offers 100:1 leverage.
Your account will be $0 with just a 100-pip shift! A 100-pip move is the same as €1. You blew your account with a one euro price change. Congrats!
You buy 100,000 pounds at the exchange rate of 1.5000
You take a power nap for 20 minutes and the GBP/USD exchange rate rises to 1.5050 and you sell.
You have earned a profit of $500.
There is a daily "rollover fee," sometimes known as a "swap fee," for positions open at your broker's "cut-off time" (typically 5:00 pm ET), which a trader either pays or earns, depending on the positions you have open.
If you don't want to earn or pay interest on your holdings, just make sure they're all closed before the market closes at 5:00 p.m. ET.
Interest rollover charges are an element of forex trading because every currency deal includes borrowing one currency to buy another.
On the currency that is borrowed, interest is PAID.
On the one that is purchased, interest is EARNED.
If you buy a currency with a higher interest rate than the one you borrow, the net interest rate differential will be positive (for example, USD/JPY), and you will earn income.
If the interest rate differential is negative, you will be required to pay.
Many retail forex brokers vary their rollover rates depending on a variety of criteria (e.g., account leverage, interbank lending rates).
For further information on your broker's specific rollover rates and crediting/debiting procedures, please contact them.
The table here will help you to find out the major currencies interest rate differentials
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