Different traders have their own styles and methods when it comes to buying and selling forex. This is because the forex market is one of the biggest and most liquid in the world and as a result there is no one single way to trade.
Knowing when to buy and sell forex depends on many factors, but there tends to be more volume when markets are volatile because of the associated higher risk. This article will explore the idea of buying and selling currencies using practical examples as well as additional resources to enhance your forex trading experience.
HOW TO BUY AND SELL FOREX
Buying and selling forex pairs involves estimating the increase/decrease in value of one currency against the other. This could involve fundamental or technical analysis as a basis of the trade. Once a basis has been established, the trader will look at other technical and fundamental aspects. Key levels of entry and exit will follow, keeping in mind risk management processes.
FACTOR WHICH AFFECTS TO CURRENCY PAIR
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The value of a currency can be influenced by political events such as government instability, corruption, and changes in leadership. For instance, when Donald Trump was elected as the President of the United States, the value of the US Dollar increased.
ECONOMIC POLICY
Forex traders pay close attention to fundamental factors such as unemployment rates, GDP, and monetary and fiscal policies, among others, as they can impact the value of currencies. Our economic calendar provides information on upcoming events that could potentially affect the financial markets.
TECHNICAL ANALYSIS
Forex traders who use technical analysis often rely on key price levels, such as support and resistance, as well as trends and other indicators to inform their trading decisions.
HOW TO BUY AND SELL EUR/USD
Here's an example of how and when to buy or sell the EUR/USD currency pair. Suppose you want to buy the EUR/USD. If the value of the EUR increases relative to the USD after you sell the trade, you could make a profit, minus any commission and other fees. In this scenario, you would be simultaneously buying the EUR and selling the USD. For instance, if you bought the EUR/USD pair at 1.1300 and it rose to 1.1504 when you closed or exited the trade, your profit would be 204 pips, as shown in the chart below.
In this example, technical analysis was used to determine the entry and exit levels for the trade.
The entry level was identified using a Morning Star candlestick pattern, which indicated a potential buying opportunity. This was confirmed by the RSI indicator, which showed an oversold signal.
The exit level was determined by using key price levels to set an initial take profit target.
A trader who uses fundamental analysis could trade the USD/JPY currency pair by keeping track of political and economic news. For example, if the trader expected the Federal Reserve to raise interest rates, this could attract more foreign investment to the US, increasing demand for the USD. In this case, the trader could enter a long (buy) position, expecting the USD to appreciate in value. However, it's important to note that economic theories don't always translate perfectly to real-world conditions. Shorting forex pairs is a bit more complex than buying. You can learn more about how to short forex by reading further on the topic.
UNDERSTANDING RISK MANAGEMENT WHEN BUYING AND SELLING FOREX
Effective risk management is crucial for long-term success in forex trading. This involves not only having a positive risk/reward ratio, but also being aware of potential volatility swings. Factors that affect forex pairs can have significant impacts, so it's important to use proper risk management techniques to prevent adverse effects on your trades. Forex trading can be complex, so it's essential to understand the mechanics behind it, such as how to read currency pairs, before initiating a trade. We recommend reading our beginner's guide to forex trading to learn the basics.
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