Here is where we talk about fundamental analysis as a way to buy and sell currencies. Now, it is important to mention that this doesn’t require some kind of PHD in Economics. There are plenty of people who trade forex who have an understanding of the market, and keep up with the news, but do not actually have any formal education when it comes to economics. They might have experience in the market, some intuition, and the ability to understand how catalysts affect the market. Every individual has a different strategy, but this is important to note for those who might feel discouraged at their lack of knowledge.
The euro is the buy currency, and the reason whether the trader or investor would buy or sell.
Here, you must decide if, for whatever reason, you feel that the dollar is going to weaken. If you feel this way, it would be advantageous for you to purchase the euro, because you believe that the dollar will weaken in value, and as a result, the euro will be stronger in relation to it.
The U.S. dollar in THIS case is actually the base currency, and if one purchases it in this particular currency pair, the idea is that the Japanese yen would weaken against it. There could be many reasons that you do this. It might be that you believe the Japanese government will weaken the yen for their own reasons, which could involve trade, for example. It might be that you believe that a political scandal will weaken the currency, or that some statistic, whether it’s unemployment numbers, or some other catalyst – will affect the price. After you see the yen depreciate, you would be selling the dollar against the yen, making a profit.
Here, you are purchasing the British pound, and expecting that it strengthens against the U.S. dollar. Getting the hang of it now?
So, again, you would be buying the British pound believing that the U.S. economy would weaken, or you would be selling the British pound if you believe that the U.S. economy will be stronger than ever.
At this point, you should understand the concept of currency pairs, hopefully. However, just in case, let’s drive the point home with one last example.
Here, the USD is the “base” currency. So if you thought that for whatever reason, the Swiss franc was overvalued? What would you do?
Yes, you would PURCHASE the USD, because you believe that the Swiss currency is valued too highly.
Similarly, you would SELL the USD, if you, for whatever reason, felt that the Swiss currency was strong, and wanted to ensure that you weren’t purchasing AGAINST a strong currency. Get it now?