Deciding when to buy (or go long) and sell (or go short) on a forex pair requires a great deal of research and know-how. Every trader has a unique style and approach to accessing the markets, so you may need to develop one of your own.

There’s no one-size-fits-all trading strategy – it all depends on many factors. But there are a few things you could look out for to improve your chances of trading profitably.

This lesson will explore the concept of buying and selling currencies using practical examples to guide you.

What it means to buy and sell forex

Buying and selling forex pairs involves estimating the appreciation or depreciation in the value of one currency against another.

This could involve fundamental or technical analysis as a foundation of the trade. Once you have a general idea of which market to trade, you can then look to other technical and fundamental aspects to ensure you’re making an informed decision.

What is a position in forex trading?

Taking a long or short position comes down to whether you think a currency will go up or down, relative to another currency.

Simply put, when you think the base currency of a pair will appreciate you could ’go long’ on it while ‘going short’ on the quote. In the opposite sense, when you expect the base currency to depreciate, you could ’go short’. We explore the concept of going long or short in our course, ‘the basics of forex trading’.

A forex position has three characteristics:

1. The underlying currency pairs
2. The direction (long or short)
3. The trade size

Factors which affect currency pairs

Political events: corruption, elections and changes in government can all affect the value of a currency.

Economic policy: forex traders tend to keep a close eye on unemployment figures, GDP, monetary and fiscal policies or any economic releases that have influence over the value of currencies.

Technical indicators: traders who focus on technical analysis tend to favor key price levels (support and resistance), trends and other indicators to form a basis for their trades.

Practical examples of technical and fundamental analysis

In case you’re still unsure how to trade forex pairs, below are practical examples using EUR/USD and USD/JPY – two major forex pairs.

Let’s say you want to buy (or go long on) EUR/USD. Remember, this means you think that the euro will appreciate in value against the US dollar.

If the euro does indeed go up in value relative to the dollar by the time you close your position, you’d make a profit (depending on commission and other fees). And if it depreciated, you’d make a loss.

But how would you decide whether to take a long or short position on a pair?

As an example, let’s look at trading EUR/USD pair using technical analysis. We’ll look at the Relative Strength Index (RSI) indicator.

Depending on the online broker you use, you’ll have a number of technical indicators available to you on the trading platform.

The RSI is normally used in momentum trading. It measures how quickly a market’s price changed in a specified timeframe. Technical traders also use it to check whether a market is overbought or oversold, as well as give an indication of when it might experience a trend reversal based on its patterns.

As shown in the chart below, EUR/USD was bought at the 11300 price level, and the pair had moved up to 11504 at the time that the trade was closed/exited.

This means a 204-pip profit was realized. If the market had fallen to 11096 instead, then the trader would have realized a 204-pip loss.

In this example, the technical perspective was utilized:

• Entry level: the candlestick pattern shows a potential entry point, substantiated by the use of the RSI indicator (which displays an oversold signal)
• Exit level: the market was exited using key price levels to set the initial take-profit level. The same amount can be used to set a stop-loss level in the case of losses

Using technical analysis in your trading can be quite complex. You’ll need to understand how one works before employing it in your trading.

Let’s use another example to illustrate how you could use fundamental principles to choose your position on a forex pair.

Say you wanted to trade the USD/JPY currency pair. Before taking your position, you might want to look at following political and economic news relating to the two countries.

For example, if you expected the Fed to hike interest rates, you’d likely want to look at what this has done to the US economy and the dollar in the past.

Say you found that this previously attracted greater foreign investment into the US and led to a higher demand for the US dollar. You could then look to enter into a long (buy) position in anticipation of the USD appreciating in value – provided there weren’t any equally major events that could positively impact the JPY.

Of course, this is not absolutely certain as economic principals/theory don’t always translate to real world conditions. If your research found that the US dollar will depreciate instead, you might look to take a short position on the pair.

Taking short positions on forex pairs is slightly more complex as opposed to buying. We explore this more in the next lesson.