Selling and buying forex (foreign exchange) is worth your attention as its daily trading volume is pretty impressive and gives an understanding of the financial market realities and its participants’ cooperation. High trading volume equals high liquidity and this is where the traders get profitable benefits from – high liquidity means reduced transaction costs.
The essential point to remember is that your trading moves will always depend on various factors that make the currency move up and down like world events, economic stability, interest rates, political situation, and others. Buying and selling forex means having a strategic vision of what to buy and sell and when to do it to draw income. So how exactly do you organize the trading process? Do you want to know when to buy and sell forex? Let us guide you through the whole process from A to Z.
Select a currency pair
The principle of buying and selling currencies is simple: forex trading stands for buying one currency and selling another one at the same time, thus all currencies are quoted in pairs: let’s start with one of the most traded currency pairs in the market - EUR/USD as our example.
EUR is the base currency, the one that you buy or sell.
USD is the quote currency, the one that presents the price of the base currency.
Each currency pair is peculiar and has its own trajectory of movement, so as for the beginning it will be the right thing for you to learn and analyze the market performance of every currency pair that you potentially want to trade. Here are three important criteria that might help you in defining suitable trading conditions: bid-ask spread, volatility, and the time of activity of the currency pair.
Analyze the market
Do you want to understand how to buy forex? Look before you leap. Never start trading without research and analysis, stay away from assumptions. Many traders ignore the importance of following the strategy and, in most cases, they operate on emotions which results in financial losses. We strongly recommend you to start the research with a particular currency pair and create a demo account to track real indicators and charts.
The primary benefit of a demo account is that you can learn from your mistakes without losing money, this is where you observe the real market movements that will define your strategy. Open and close your positions, assess technical indicators to define a pattern in the price movements, read the daily forecasts and market overviews to broaden your understanding of the potential risks. Analyze your previous positions every time you want to open the new one, that’s the golden rule of improving your trading skills.
Make it a habit to analyze the market before you start trading. Forewarned is forearmed.
Read its quote
There are two prices presented for all the currency pairs: sell (bid) price and buy (ask) price.
Let’s go back to our EUR/USD currency pair where the sell price means that you’ll sell the base currency (EUR) and buy the quote currency (USD), while with the buy price you’ll buy the base currency and sell the quote one. The sell (bid) price is always lower than the buy (ask) price.
The difference between the sell and buy prices is called the spread which is the amount that your broker charges for making the trade. The amount of spread can be different due to different currency pairs, volatility, the size of your spread, and different brokers. Major currency pairs (EUR/USD, USD/JPY, GBP/USD, and USD/CHF) have lower spreads due to their high trading volumes.
Pick your position
You’re buying one currency while selling the other one at the same time which enables you to speculate on up and down movements of the currency pairs. So, let’s take a closer look at forex trading examples with buying and selling positions keeping our EUR/USD currency pair as an example.
Choosing a buy position, the trader is sure that the value of the base currency (EUR in our case) will strengthen against the quote currency (USD in our case)) which makes him/her a bull trader.
Choosing a sell position, the trader believes that the value of the base currency (EUR) will weaken against the quote currency (USD) and this is what makes him/her a bear trader.
Understanding risk management
Every trader is interested in buying and selling currency for profit but the risk is always around the corner. Forex risk management makes it possible for traders to implement certain rules to ensure that any potentially losing trading scenario is under control. Some traders tend to lose money not just because of being inexperienced but also because of ignoring or being unaware of the importance of risk management.
We’re not saying that trading is always about having positive results and if they’re negative then it brings the trader’s competence into question. No, it’s about learning and analyzing to develop expertise, and narrowing down all the possible losing decisions and moves that might be made because of the lack of knowledge. Here are the potential trading risks that might lead to unprofitable trading unless you prioritize planning and analysis.
Leverage means using borrowed funds for trading operations. The problem is that it might lead to losing more money than it was initially deposited for opening a trade.
The financial market is volatile as it’s influenced by different world events like political situations, economic decisions, or even environmental conditions which leads to fluctuation of currency prices.
Interest rate risk
An economy’s interest rate influences the value of its national currency which greatly affects volatility and means that traders can experience unexpected price changes.
It all comes down to the trader’s inability to execute the trade quickly, so the trade isn’t closed at the expected price.
Risk management tips
Using efficient and time-tested techniques can profoundly boost your trading expertise. No matter how experienced you are - there is always a possibility of an unexpected scenario in the foreign exchange market where you should implement your risk management strategies for a better understanding of how to buy and sell forex.
Build a trading plan
Never start trading without having an analyzed plan which can help you to be disciplined in a highly volatile forex market. The main purpose of the plan is to answer the questions that strongly depend on your trading objectives like what, why, when, and how. Your plan is something very personal, so copying the plans of other traders might lead you to uncalculated decisions. Your plan reflects what you can and can’t do.
Think of a plan as your trading lighthouse.
Think whether your risk is affordable
One of the fundamental rules of trading says that you should always consider whether the risk is affordable. There are so many cases when this rule is left aside and traders are faced with heavy losses while buying and selling money unthinkingly. A tested rule of not risking more than 2% of your account balance per trade is here for you to bear in mind.
An aggressive trading strategy chases high profits in a short period of time. It’s okay for risk-takers who are 100% sure in their strategy, but it’s not everyone’s path. Maintaining clear thinking and setting realistic goals following your trading strategy is what you should start with. Trading is not just about entering a winning position, it’s also about exiting it when the market is against you and accepting the fact that sometimes your moves aren’t the winning ones. Make conclusions and stay away from emotions.
Use a stop loss
That’s a tool that will automatically close your order at a predefined price once the market took an unplanned turn. You open a position with the hope that it will increase in value but it actually decreases and hits your stop loss. This is how you’re not spending more.
You’re about to discover the world of trading with all its volatility and liquiditу. Knowing when to buy and sell forex depends on many factors, so make sure you know the market. Trading is not that difficult if you clearly understand that biting off more than you can chew is not working there. Step by step, plan by plan, analysis by analysis and you’re on top – just give it time and you’ll understand the meaning of buying and selling forex better.
Start with learning how to use all the features that the trading platform has to offer before buying and selling currencies with real funds. You should consider starting your trading path with a demo account, so you can practice unfamiliar strategies in a risk-free environment where you’re not losing anything but just acquiring skills. A lot of successful traders will test their trading strategies using a demo account before they try to buy and sell currencies in a real account. Join millions of traders who had started their path years ago, they were beginners, and they didn’t know a lot of things too. Just start diving in.