The FX market is a trillion-dollar arena; infinite methods to buy and sell currencies come with this. Trading, at its core, is simple for the layman to understand. You simply buy when you believe something will appreciate or sell when you suppose something will depreciate.
Of course, successfully arriving at this decision is a whole different story. It’s both art and science, consuming years of practice and mastery. Here, we’ll go through the main elements of when and how to buy and sell forex pairs.
What does it mean to buy and sell forex pairs?
When you buy forex pairs, you anticipate that the price will increase at some point. Likewise, when you sell forex pairs, you expect that the price will decrease at some point.
This future stage can range from a few seconds to a few years, depending on the type of trader. For instance, scalpers typically hold their orders for up to a few minutes. On the other hand, investors like swing traders and position traders can stay with their trades for a few weeks, or longer.
When you buy and sell forex markets, the price has to move some distance in your favour from your entry point to a specific ‘take profit’ level.
Alternatively, many traders do not have a fixed profit-taking area when they buy and sell currency pairs. Instead, they may prefer to let their positions run and lock in some gains using a trailing stop.
You are trading pairs when you buy or sell forex markets. When you ‘go long’ (buy) on a pair, you are simultaneously selling the other currency. On the other hand, when you ‘go short’ (sell) on pair, you are concurrently buying the other currency.
This dual relationship is what makes FX unique compared to other markets. Although a pair is a collective instrument, studying one half of it can offer an idea of how the other portion may perform.
A key element to understanding when to buy and when to sell forex markets is speculation, a concept that refers to several things. Speculating in the context of forex is taking a position with an equally substantial risk of failing and winning, mainly thanks to high margin.
In simple terms, FX traders can quickly lose or make a lot of money. Speculation is also characterised by short-term hold times, unlike traditional long-term investing strategies where you simply purchase an asset and hold it.
Lastly, predictive luck plays a massive role when you buy and sell currency pairs. This means that, no matter how much you study a market, you can never be entirely sure about future price movements.
Yet, the aim is to capitalise on when your predictions are correct and limit losses when they are wrong. While it may seem like luck is involved, a skilled trader understands the probabilistic nature of trading and takes calculated risks.
You don’t have to win on all your positions when you buy and sell forex markets; gain as much as possible when your trading idea works out and lose a little when it fails.
So, now we understand the speculative environment of currency trading. How do you know when a pair’s value will rise or fall?
Traders answer this by using fundamental analysis, technical analysis, or a combination of the two.
Fundamental analysis (FA) in buying and selling currency pairs is the study of economic, social, and political factors. Here, a trader goes beyond the charts and seeks the intrinsic value of a currency linked to a particular economy.
Intrinsic value is measuring what something is truly worth, uncovering any points at which it may be undervalued or overvalued.
We measure a currency’s value primarily based on how its economy performs according to factors like interest rates, Gross Domestic Product, Consumer Price, and employment figures, among other things.
Of course, other elements will cause a currency to be more or less valuable compared to another, like political and socially-driven events. Brexit is a prime example of something that was less driven by Britain’s economy but dramatically affected the pound’s value.
Authorities in forex regard fundamentals as a leading indicator, meaning that they offer a signal BEFORE a price movement has started.
While this idea may be true, FA blurs the lines between subjectivity and objectivity, similar to technical analysis. Also, some traders argue about their power to make price predictions in the short term. Lastly, studying fundamentals is more complex.
A technical analyst is buying and selling currencies by examining historical price data through chart patterns, candlestick formations, indicators, and other tools. In a nutshell, TA (technical analysis) is about using the past to predict the future.
Of course, everyone knows that past outcomes in any traded market do not guarantee future results. But this doesn’t matter in figuring out when to buy and sell in forex. Once a specific pattern has occurred enough times before, there is a good chance it will happen again.
Even though everything may appear random, a technical analyst finds order and profitably exploits a particular structure.
One benefit of TA is that everything you need to study is on the charts. This is unlike fundamental analysis, which needs external and often time-consuming research.
Yet, most of TA is lagging, meaning that it produces a signal to buy sell forex prices AFTER the move has begun. Despite this perceived drawback, TA is essential for entering a position when you buy and sell forex markets.
When to buy or sell in forex
By now, you should understand the ‘what’ of buying and selling currencies. What about the ‘when?’ How to know when to buy or sell forex? Do you look at the stars? Do you use tarot cards, perhaps?
Of course, it’s not anything that deep. It’s all about having a strategy, a game plan. Think of a football manager. They employ a variety of unique tactics to outsmart the opposition and win matches.
Traders aim to achieve the same analogous outcome when they buy and sell forex markets. Your strategy is the blueprint that guides your actions. It helps with:
- Trading tactics: This is the most essential element for any strategy. You develop complex rules and techniques to determine when to buy or sell in forex accurately. Creating tactics involves technical and fundamental analysis (or a combination of the two).
A trader can spend several months or years in screen time practising their strategy to perfection.
- Selecting the best market: Most traders typically specialise in buying and selling currencies with a handful of markets. Some strategies work better on some pairs than others.
- Position sizing: Size is absolutely crucial in knowing when to buy and sell forex pairs. A strategy must dictate the appropriate lot size that aligns with a comfortable monetary risk.
- Entry and exit points: Lastly, a strategy offers a different set of rules for entry and exit points for winning and losing positions. Here, it’s crucial to define a risk-to-reward ratio so that you have a rough idea of your profit target in relation to your stop loss.
Truthfully, there are gazillion strategies. But they generally fall into the following categories:
The simplest way to buy and sell forex instruments is to trade with the trend. But what do we mean here? This is about following the direction price has travelled for the longest period. Needless to say, there are several methods to detect the trend.
A tried-and-tested way is with a trend line, a diagonal line connecting swing highs and lows. The rule of thumb is that the market has to touch the line at least three times to confirm a trend.
Let us look at an example with GBP/JPY to demonstrate when to buy and sell forex pairs with a trend line.
Here, we have the price touching the trend line on three occasions. Once this happens:
- The trader waits for an opportunity where the market bounces on the line.
- The next step is looking for a price action pattern suggesting the price is likely to resume the trend. This is typically a candle with a long tail/wick or an engulfing pattern. Also, you should wait for the candle to close instead of entering while it’s forming.
- Traders will enter and leave their stop loss below the last swing high/low. There is no hard-and-fast rule on where to take profits.
Another basic and popular method to buy and sell forex markets with trends is the moving average (MA), one of the most popular indicators. Here, traders use the MA like a trend line by looking for moments where the market bounces off it and presents a specific price pattern similar to the last example.
Let’s look at the daily chart of NZD/CHF.
Here, we see two instances where the price returned to the moving average. The first scenario had a pin bar after several candles failed to break above the MA. In the second event, there was a bearish engulfing candle.
Determining when to buy or sell in forex with price action is about waiting for the candle to close before entry. As with a trend line, ensure your stop is above or below the previous swing high/low.
Trading a reversal pattern is going in the opposite direction of the predominant trend. One technique here is to use the moving average crossover system. An additional MA is used as a confirmation filter to enter into a potential reversal.
So, when to buy and sell forex pairs here? Simple. You would enter into a position once both moving averages intersect with each other. Let us demonstrate with an example on the 1HR chart of CAD/CHF with the 50 and 200 MA periods.
Before the crossover (circled on the chart), the price was trending up. When the intersection happens, traders wait for a candle close before going long or short, as with the last example. Likewise, you should place the stop loss several pips above the nearest swing high/low.
Another technique to buy and sell currency markets through reversals is divergence, most commonly with an oscillator like the RSI (Relative Strength Index). Here, traders look for moments when the high-low structure of price doesn’t correlate with the indicator.
Here’s an example of bullish divergence on the 4HR chart of EUR/USD. We can see the two consecutive lower lows on price while the RSI produced a lower and a higher low.
So, when to buy or sell in forex here? You should always wait for an extra candle after spotting the divergence. As with the other strategies, your stop loss should sit above/below the last swing high/low.
As we know, the price doesn’t always move in a defined trend. Many opportunities exist to buy or sell forex pairs through sideways markets. Using simple support and resistance or a volatility indicator like the Bollinger Bands, you can identify range-bound conditions.
For Bollinger Bands, we look at periods where the bands appear flat or contracted, suggesting a quieter market. This is how range generally happens. Once identified, traders wait for the price to bounce between the upper and lower bands and trade when it closes below or above it.
Here’s an example with the 4HR chart on gold (XAU/USD) below.
We have circled the spots where the market formed a range between the 1618 and 1670 price levels. These are all areas of potential entries to go long or short. The price eventually broke out of the upper band in the blue-circled section.
Another technique to buy and sell forex pairs is with breakouts. The strategy here is to exploit moments where traders anticipate the price to move explosively in one direction, typically after a period of consolidation or range.
There are several strategies to trade breakouts, ranging from symmetrical triangle patterns (e.g., wedges, pennants, flags) to simple support and resistance.
We will demonstrate an example of the latter using the RSI on the daily chart of CAD/JPY.
The RSI helps you spot overbought and oversold conditions that signal the movement’s strength. We can see that the price was ranging for several weeks. When it approached the 91.70 area, there was strong upside momentum on the RSI (overbought).
Here, you would have entered once a candle has closed while the RSI is overbought.
How to buy and sell forex pairs
Now that you know some popular strategies to buy and sell forex markets, the next question is how to do it. Here are the steps to follow:
- You should be familiar with your broker‘s supported charting platform at this stage. Also, the broker will be appropriately regulated and have a favorable reputation.
- With your trading plan, carefully watch for potential opportunities to buy and sell currencies.
- Once you have identified a set-up that meets all your criteria, go onto your platform’s order screen. It’s also best to avoid one-click trading and opt for a manual order so you can apply a stop loss beforehand.
- Once your order is live, refer to your trading plan to guide you on managing your positions, whether they hit your stop loss or show a floating profit.
- If your trading idea fails, move on and look for new set-ups. If your set-up yields some profit, great stuff!
The techniques discussed here only scratch the surface. There are more ‘secrets‘ you learn the more you get experience. Regardless of the strategy, you should be 100% sure when to buy and sell forex pairs. Skilled traders have thoroughly mastered their trading plans to execute without hesitation and emotion.
Most importantly, one must manage their losses to a comfortable level and ensure they don’t blow their account.