April 19, 2021 | AtoZ Markets – Suppose you have been following facts about forex trading. In that case, you might have crossed about information saying that it tries to predict or speculate one currency’s price movement against another currency. But how does a trader discern the perfect moment to buy and sell currency pairs?
The exchange rates of currencies make movements due to many economic factors. We all know that each country or region has its own economic state where factors such as interest rates, manufacturing, employment, productivity, foreign trades, and the like are heavily involved.
Citing some helpful example scenarios
Let us list down some examples that involve currency pairs and fundamental analysis that may help a trader know the right time to buy or sell currency pairs.
The Euros and the US Dollar
In the EUR/ USD currency pair, the first and base currency is the EUR. We can use this as a basis when we buy and sell. We have mentioned that a country or region’s economic status significantly affects the currency pair’s price movement. If this is the case, when a trader expects that the US economy is starting to weaken, then a buy order for the EUR/USD is a wise move. It is because when the US economy weakens, the US dollar also weakens. Currencies are all interconnected. A decrease in one currency means a rise for another; hence the rationality of buying a EUR/ USD currency pair as EUR will soon increase after the decline of the USD. If the situation goes the other way around where the trader expects the US Dollar to rise, it might be wise to sell a EUR/ USD currency pair.
This example does not only apply to the EUR/ USD. We can also use this logic with other major currency pairs such as GBP/ USD, USD/ CHF, or other currency pairs.
The USD and the Japanese Yen
Another example of a currency pair is the major currency pair USD/ JPY. Assuming that a trader expects the Japanese Yen to weaken when the government needs to do it to give one of their industries a little boost, buying a USD/ JPY currency would be a great idea. In this case, the trader expects that the US Dollar will rise against the Japanese Yen because of their actions.
If the other way around happens and the trader thinks that the Japanese Yen is about to rise since the government converts their USD back to the JPY, it might be good to make a USD/ JPY sell order. Selling the USD means that the trader speculates that the USD will weaken compared to the JPY.
To sum it up
Given these two examples, we can now have an idea about the best timing to buy and sell currencies. We also realized that news and political events contributing to the economy massively impact the movement of exchange rates. Thus, a trader needs to be up to date with these to make profits in forex trading.