What Does Buying or Selling a Currency Pair Mean?
In forex trading, you are always buying one currency and selling another. A currency pair like EUR/USD tells you the value of the euro relative to the U.S. dollar. If you believe the euro will strengthen, you buy EUR/USD. If you believe it will weaken, you sell EUR/USD.
But how do you know when to buy or sell?
That’s where basic fundamental analysis comes in.
Use Fundamental Analysis to Guide Your Trade
Fundamental analysis in forex looks at the economic health of countries to determine whether a currency will rise or fall. When a country’s economy is strong, its currency tends to strengthen. When it weakens, the currency tends to fall.
Think of it like betting on a nation’s performance.
Here are some simplified examples to help you understand:
EUR/USD (Euro / US Dollar)
- BUY EUR/USD if you think the U.S. economy is weakening and the euro will gain value.
- SELL EUR/USD if you believe the U.S. economy is strong and the euro will weaken.
Example:
“I expect U.S. inflation data to come in worse than expected. That’s bearish for the dollar. I’ll BUY EUR/USD.”
USD/JPY (US Dollar / Japanese Yen)
- BUY USD/JPY if you think the yen will weaken—for example, if Japan starts printing more money or cutting interest rates.
- SELL USD/JPY if you believe Japanese investors are bringing their money home, strengthening the yen.
GBP/USD (British Pound / US Dollar)
- BUY GBP/USD if you expect the UK economy to outperform the U.S.
- SELL GBP/USD if you believe the U.S. economy is stronger or UK data looks weak.
USD/CHF (US Dollar / Swiss Franc)
- BUY USD/CHF if you believe the Swiss franc is overvalued or global investors are moving away from “safe haven” currencies.
- SELL USD/CHF if you expect the U.S. economy to slow down, weakening the dollar.
Trading in “Lots”
In forex, you don’t trade 1 euro at a time. Trades are grouped into:
- Micro Lot: 1,000 units
- Mini Lot: 10,000 units
- Standard Lot: 100,000 units
Your broker allows you to trade larger amounts through leverage.
What is Margin and Leverage?
Leverage lets you control large positions with a small amount of capital. For example:
- With 50:1 leverage, you only need 2% of the total trade size.
- A $100,000 trade would only require $2,000 in margin.
Real Example:
- You buy 100,000 GBP/USD at 1.5000 (that’s $150,000 worth).
- Margin required = 2% = $3,000.
- Price rises to 1.5050.
- Profit = $500 in minutes.
That’s a 16.67% return on capital… but it works both ways.
High Leverage = High Risk
That same $500 gain could have been a $500 loss if the price moved the other way. You can blow your account fast if you don’t manage risk properly.
Always remember: small movement × high leverage = big impact.
What Is Rollover?
If you hold a trade overnight (past 5:00 PM ET), you may earn or pay interest, depending on the interest rate difference between the two currencies in your pair.
- If you buy a currency with higher interest, you earn rollover.
- If you buy a currency with lower interest, you pay rollover.
Here’s a quick guide:
| Country | Currency | Interest Rate |
|---|---|---|
| United States | USD | 4.25–4.50% |
| Eurozone | EUR | 3.00% |
| United Kingdom | GBP | 4.75% |
| Japan | JPY | < 0.25% |
| Australia | AUD | 4.35% |
| New Zealand | NZD | 4.25% |
| Switzerland | CHF | 0.50% |
Traders often use interest rate differentials to earn passive income through rollover—called carry trading.
Conclusion
To know when to buy or sell a currency pair, pay attention to the economic conditions of the countries involved. Use fundamental analysis to forecast currency strength or weakness.
Then choose your direction:
- Buy if you expect the base currency to strengthen.
- Sell if you expect the base currency to weaken.
Always manage your risk, understand your leverage, and never trade blindly.