Buying and Selling in Forex

Currency trading in Forex is based on a simple foundation of buying one currency while selling another. However, beyond that simplicity is a rapid global marketplace where fortunes can change in a second. If you are wondering how traders determine when to buy or sell currency and what the reasoning behind those trades is, you are not alone.

Being familiar with how to buy and sell currencies in Forex is crucial for successfully navigating this global financial market, and debit and credit processes are just the beginning of it. We have endeavored to remove jargon, clarify the process of buying and selling currency, and expose how traders capitalize on currency movements to create profitable opportunities.

Basics of Buying and Selling

In Forex, currencies are always traded in pairs, such as EUR/USD or GBP/JPY. The currency pair consists of two currencies; the first currency is the base currency and the second is the quote currency. If you buy a currency pair, you are purchasing the base currency and selling the quote currency. Conversely, if you sell a currency pair, you are alternately selling the base currency and buying the quote currency.

Tale example:

•  If you were to buy EUR/USD, you are speculating that the euro will have an upward price movement v. the US dollar.

•  If you sell EUR/USD, you are speculating that the euro will have a downward price movement v. the US dollar.

The "two-way" nature of Forex allows traders to potentially profit in both rising and falling markets if the anticipated movement provides an opportunity.

Bid and Ask Prices

Every currency pair has two prices, the bid (the price at which you can sell), and the ask (the price at which you can buy). The difference between these two prices is called the spread.

For example, EUR/USD is quoted at 1.1050 / 1.1052.

•  Bid = 1.1050 (sell)

•  Ask = 1.1052 (buy)

•  Spread = 0.0002 or 2 pips

The spread is your cost of trading, as it represents the slight loss you'll incur going into the trade due to this difference.

How To Know When To Buy or Sell

Traders typically concentrate on two main types of trend analysis, depending on their trading strategy and investment objectives.

1. Fundamental Analysis

The analysis of economic and political events affecting the value of a currency. These fundamental events are items such as interest rates, employment figures, inflation, and political uncertainty in the country or region. For example, a government may raise interest rates, which will increase the balance of interest rates and make the currency stronger, as higher interest rates attract foreign investors.

2. Technical Analysis

The analysis of charts, patterns, and indicators to give a predicted description of currency price behaviour. Traders analyze their charts to identify the asset's trend, including price levels of support and resistance, and use indicators like moving averages or the RSI (relative strength index) to determine whether to buy or sell.

Many successful traders will usually study both types and try to draw more complete conclusions about the market using both techniques.

The Effects of Leverage

One of the key features of Forex is its ability to utilize leverage on positions, allowing for amounts much larger than the actual cash outlay. For instance, if you opened a leverage of 50:1, in this case, a deposit of $1,000 would allow the trader to leverage a position of $50,000. In essence, leverage gives a trader the potential to magnify profits or losses on trades.

The Forex market is accessed 24/7, which has higher risks since the trader can only manage the risk. If the market moves against a trader's position, the trader is losing on the total trading size and not on the start deposit size, which is why managing the risk is critical in Forex when buying or selling.

Market Orders vs. Pending Orders

When a trader makes their intentions to buy/sell, there are several different ways to make orders.

• Market Order - instant execution of buy or sell on the current market price (or best available price).

• Limit Order - only to be filled when price volume increases. Order Types: Various order types exist to place your trades; the most commonly used are:

• Market Order: Executed as quickly as possible at available prices, often at the bid or ask price.

• Stop-Loss: This order stops your trade at a loss or determines where to exit the price movement.

• Take-Profit Order: An order to take profit at predefined areas of price movement.

• Stop Order: Becomes a market order when the price reaches a certain point, commonly used to limit losses (stop-loss order) or take profits (take-profit order).

Knowing which type offers you better control of your entry and exit points is crucial.

Example Trade: Buying EUR/USD

Assume that EUR/USD is trading at 1.1000 / 1.1002. You want to buy the euro (reason doesn't matter for the example).

You place a market buy order at the ask price of 1.1002.

•    If the market moves in your favor and the price is 1.1050 when you close the trade, you will sell the euros back at the bid price of 1.1050.

•    Your profit is the difference between your entry and exit prices, less the spread, and whatever the broker charges.

Example Trade: Selling GBP/JPY

Now, assume that GBP/JPY is at 160.50 / 160.55. You are expecting the pound to weaken against the yen so that you will sell at the bid price of 160.50.

•    If the market moves in your favour and the price is 159.80 when you close the trade, you buy back at the ask price of 159.80.

•    Again, the difference is your profit, less the spread and whatever the broker charges.

Common Mistakes with Buying and Selling

1.  Over trading

Taking too many positions without a plan means that spreads will add up, and you will lose due to poor decisions.

2.  Ignoring the Spread

Spreads, especially for intraday traders, can eat away your profits quickly if not accounted for in your trading.

3.     Bad Risk Management

If you're trading without stop-loss orders or risking too much on a trade, you'll struggle.

4.  Chasing the Market

Too many traders see the market spike, make an impulsive entry, and buy high and sell low.

Risk Management in Action

Professional traders never risk more than a small percentage on a single trade (often 1%-2%). Experienced traders will demonstrate risk management practices such as using stop-loss orders to cap their losses, as well as using take-profit levels to lock in their profits.

Position sizing is just as critical, as larger trades will yield larger returns, but also larger losses. Position sizing to risk tolerance and overall strategy is essential for long-term success.

How to Create a Buying and Selling Strategy

A good strategy will provide the answers to:

•  What signals are used to indicate a buy/sell opportunity?

•  What are your confirmation signals?

•  Where do you plan on placing your stop-loss and take-profit limit orders?

•  How much of your account are you willing to risk on this trade?

If you can backtest your strategy with previous historical data and then practice with a demo account, you can refine your strategy without risking any capital.

The Psychological Side of Trading

Buying and selling decisions, whether or not, will likely not come down to the charts or economic news. It usually comes down to how you managed your emotions. For example,    fear can cause traders to exit trades far too early, while greed can keep traders holding onto losing trades.

Discipline is key to trading.  Remaining compliant with your trading plan, even when the market is giving you the temptation to deviate, will separate you from traders who consistently struggle.

Conclusion

It may seem simple in theory to buy and sell in Forex, but you require a combination of knowledge, strategy, and discipline to do so effectively. Understanding the mechanics behind how currency pairs work, how to read bid and ask prices, Entry and Exit strategies, and risk management will place you significantly ahead of most beginner traders.

The most significant part about trading in Forex is the flexibility; you get to profit in both rising and falling markets; however, with this flexibility comes great responsibility. Enter each trade with a detailed plan, honour your risk restrictions, and you will be in a much better position to navigate the world's largest financial market with confidence.