Know When to Buy or Sell a Currency Pair

When to Buy or Sell a Currency Pair

Forex trading involves speculating on whether one currency will rise or fall relative to another.
To decide whether to buy or sell, traders often use fundamental analysis, which looks at the underlying economic health of a country or region.

A currency’s value is influenced by supply and demand, which in turn is driven by economic conditions such as:

• Growth and productivity
• Employment levels
• Manufacturing output
• International trade
• Interest rates

You don’t need to be an expert economist at this stage—we’ll cover fundamental analysis in-depth later. For now, here’s how fundamental factors can guide your trading decisions.

Examples of When to Buy or Sell Major Currency Pairs

EUR/USD

Here, the euro (EUR) is the base currency.

• Buy EUR/USD if you expect the U.S. economy to weaken, which would likely weaken the U.S. dollar.
  You’re buying euros with the expectation that the euro will appreciate against the dollar.
• Sell EUR/USD if you expect the U.S. economy to strengthen or the euro to weaken.
  You’re selling euros, anticipating they will decrease in value relative to the dollar.

USD/JPY

Here, the U.S. dollar (USD) is the base currency.

• Buy USD/JPY if you think Japan may take action to weaken the yen, such as easing monetary policy to support exports.
  You’re buying USD expecting it to rise versus the yen.
• Sell USD/JPY if you believe Japanese investors are converting U.S. assets back into yen or if the dollar is expected to weaken.
  You’re selling USD expecting it to decline relative to the yen.

GBP/USD

Here, the British pound (GBP) is the base currency.

• Buy GBP/USD if you believe the U.K. economy will outperform the U.S. economy.
  You’re buying pounds expecting them to rise against the dollar.
• Sell GBP/USD if you expect U.K. economic performance to weaken while the U.S. remains strong.
  You’re selling pounds expecting them to fall relative to the dollar.

USD/CHF

Here, the U.S. dollar (USD) is the base currency.

• Buy USD/CHF if you believe the Swiss franc is overvalued or you expect the dollar to strengthen.
  You’re buying USD expecting it to appreciate relative to the franc.
• Sell USD/CHF if you expect U.S. economic weakness to reduce the dollar’s value.
  You’re selling USD expecting it to depreciate against the franc.

Trading in Lots

Currencies are not typically bought one unit at a time. Instead, they are traded in standardized sizes, known as lots:

• Micro lot: 1,000 units
• Mini lot: 10,000 units
• Standard lot: 100,000 units

Your broker and account type determine which lot sizes you can trade.

Margin and Leverage

If you don’t have enough capital to buy large amounts of currency outright, you can still trade using leverage.

Margin is the small portion of your account you deposit to open a leveraged trade.
Leverage is the ratio between your position size and the margin you are required to provide.

Example:

• Leverage: 50:1
• Margin requirement: 2%
• To control a $100,000 position, you only need $2,000 in margin.

This allows you to control large positions with relatively small capital.

Example of a Leveraged Trade

You expect GBP/USD to rise.
You open a standard lot (100,000 units of GBP) at 1.50000 using 2% margin.

• Value of position:
  100,000 GBP × 1.50000 = $150,000
• Required margin:
  $150,000 × 2% = $3,000

The market moves in your favor to 1.50500 and you close the trade.

• Profit: $500

Because you controlled £100,000, even a small price change created a meaningful gain.

However, the same movement could have just as easily produced a loss.
High leverage increases both profit potential and risk.

For example:
If your account has $1,000 and you trade with 100:1 leverage, a 100-pip move against you could wipe out your entire account.

Understanding margin is essential. Small movements in price can have a large impact on your capital.

Rollover (Swap Fees)

If you keep a trade open past your broker’s cutoff time (typically 5:00 PM ET), you may either earn or pay interest. This is known as the rollover or swap fee.

Interest is:

• Earned on the currency you are buying
• Paid on the currency you are borrowing

If the interest rate of the currency you bought is higher than the one you sold, you might earn rollover interest.
If the opposite is true, you may be charged interest.

Rollover amounts vary by broker, account type, leverage, and interbank lending rates.

Central Bank Interest Rates (Example Table)

Country	Currency	Interest Rate
United States	USD	4.00–4.25%
Eurozone	EUR	2.15%
United Kingdom	GBP	4.00%
Japan	JPY	<0.50%
Canada	CAD	2.50%
Australia	AUD	3.60%
New Zealand	NZD	2.50%
Switzerland	CHF	0.00%

These rates are set by each country’s central bank and influence borrowing costs and currency values.