Being that the essence of this blog site is to relate foreign exchange trading in a more easier way, I will be giving you lay man’s approach for a clearer understanding of the way market moves in the forex market.
Unlike any other financial markets, foreign exchange market is traded in pairs
It is made up of two currencies as a pair which represents the financial instrument. We have 8 major currencies which are: USD, EUR, JPY, GBP, CAD, AUD, CHF and NZD. When you bring two currencies out of this list and join them together, you will have our investment instrument.
USD + EUR = EUR/USD
USD + CHF = USD/CHF
AUD + GBP = GBP/AUD
Having two currencies as our financial security means that, there are two different economies involved in each pair. That is in USD/JPY; we have USD representing the US economy and JPY representing the Japanese economy. In EUR/USD, we have EUR from European economy and USD from US economy. Therefore the market movement of this pair “EUR/USD” is determined by what is happening in the European economy and the US economy as well. That is the economic condition of this two different economies good or bad will determine the direction of the currency. When the economic condition of US economy is bad, it means that the US dollar is weak in this sense you will be selling it and vice versa. The simple general fundamental rule is to buy the stronger currency and sell the weaker currency.
Among the two currencies making a pair, we have the counter currency and base currency. The first currency among the pair is the base currency while the second currency is the counter currency. In the pair EUR/USD for example, the EUR is the base currency while the USD is the counter currency. Also in the pair USD/CHF, USD being the first currency in the pair is the base currency while the CHF is the counter currency.
Understood? I hope so, and then let’s proceed.
When a sell order is issued to your broker to sell a currency pair, it means you are selling the base currency (i.e. the first currency in the pair) and at the same time buying the counter currency. Confused? No need to be, just know that when you place a sell order in your broker’s platform to sell Eur/Usd it means you are selling EUR and at the same time buying USD in exchange. When you place your buying order to buy EUR/USD, you are actually buying EUR being the base currency and at the same time selling USD being the counter currency in that pair.
Bringing this lesson practically, if an economic news is released in US economy signifying that the economy is really in a good shape, As a good forex trader, I will be buying the USD as a stronger currency.
This will be done by placing a sell order on EUR/USD, a buy order on USD/CHF, a buy order on USD/JPY, and sell order on GBP/USD. Understand that when I place a sell
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