We made the comparison of the balance in which a currency is compare with other currency that there is in the pair, but to make that comparison we will need to know of fundamental analysis, basically this is make with macroeconomic data like can be inflation, job creation, etc., that will allow us to make that comparison between both currencies and therefore their economies.
How we read a pair?
In a pair exist two components, the base currency and the quote currency, the base currency is the currency on the left and the quote currency is the currency on the right.
The reason to represent the pair like this is simple, when we bought a currency simultaneously we sell the other. In order to buy a currency or to sell it we will be based on economic data that throughout the day leave, so that if we are seeing that the economy of the represented currency is going well, that will favor it against the other, and in case of going badly it harmed it.
EUR/USD: 1.4515
The base currency is the one that is to the left of "/" of the pair and the quote currency is the one that is to the right, the quote currency has several terms as quote , counter and terms currency. On the previous example the base currency will be the Euro, which it is represented as EUR. And the quote currency will be the Dollar, which is represented as USD.
When we are going to to buy a currency as it can be the Euro, the value say to us how much we must pay by the unit of the quote currency to buy an equivalence of the base currency, in this case the Dollar, this case 1 Euro is worth 1,45 Dollars.
In case that we are going to sell a currency as can be the Euro, the value say to us how many units of the quoted currency you must sell by a single one of the base currency, in this case 1,4515 Dollars are worth 1 Euro.
The reference currency therefore always will be the base currency not the quote currency, since if the economy of that currency is going well we will buy and in opposite case we will sell I . But that if always we must understand that when we bought the base currency, we will sell the quote currency at the same time.
A detailing that we want to do is that when we sell or we buy a currency we will have to pay spread established by broker.
Long / Short
When we buy or we sell does not appear to us in our desk of the broker BUY or SELL, but that will appear to us like Long or Short. So Buy is equivalent to open a Position in Long, and to Sell is equivalent to open a position in Short.
Like in the Shares, we will buy a currency when this has a relatively low price, hoping that this is increased of value with respect to the other currency. It is to say that if we bought, the currency base will increase of value against the quote currency. This will be to Enter Long.
In case of a sale, this will be the opposite case we will sell a currency when we consider is relatively high, and we hope that the value diminishes with respect to the other currency. It is to say that if we sell, the currency base will depreciate of value against the quote currency. This will be to Enter Short.
In both case we will be able to close the position when we consider opportune, being able to even hold the position per days months, but having in consideration that broker will charge or pay an interest to us depending on the differential of interests between both currencies.
The Spread
We have already said that brokers charge us the spread, we are going to clarify as spread works. As we can see in the image, all brokers will provide two prices to us, that are the Bid and Ask.The Bid is the price that broker is ready to buy the base currency in exchange for the quote currency.
The Ask the price that broker is ready to sell the base currency in exchange for the quote currency.
However when we made a buy, we just have to do a click in Buy and will buy the Euro to 1,2418, in case Euro raises, if we wanted to close the position, this will be closed at the price of the market with respect to the sell price.
In case that we want it is to sell, we just have to do a click in Sell and we will sell the Euro to 1,2415, in case that Euro falls, if we wanted to close the position, this will be closed at the price of the market with respect to the buy price.
In order to decide if to sell or to buy we must be based as much on a technical analysis as fundamental, returning to the example which we put of the balance, which we will do is to heft the macroeconomic data (fundamental analysis) and to make a verification with a technical analysis.
This concept works basically in all the pairs. Let see some examples but basing to us on fundamental analysis, we know that you do not have knowledge of fundamental analysis but we will make simply so you can get the basic concept.
EUR/USD
If you think that the economy of the United States does not go well, of course that will be bad for the Dollar, then what we will do is to buy a order/position EUR/USD. We will be buying Euros so that we hoped that the Euro increases its value against the Dollar.
On the contrary if we thought that the economy of the United States is going well and the European Community is not going so well, then what we will do it is to sell a order/position EUR/USD. We will be selling Euros so that we hoped that the Euro depreciates its value against the Dollar.
USD/JPY
On this pair, the base currency will be the Dollar, and the quote currency the Yen.
If we thought that the economy of Japan does not go well, by the example that the government debilitates the Yen so in this way to have more exports, then what we will do is to buy a order/position USD/JPY. Thus we will be buying Dollars so that we thought that the Dollar will raise with respect to the Yen.
On the contrary if you think that Japanese economy is going well, or the investors are selling American bonds, or any American market and converting those Dollars to Yens, then you will execute an order/position of sell USD/JPY. So you will sell Dollars because you think the Dollar will fall against the Yen.
GBP/USD
In this pair, the base currency will be the Pound, and the quote currency will be the Dollar.
If you think that the United Kingdom's economy is going well, as far as economy growth, inflation, etc then you will buy an order/position GBP/USD. In other words you will buy Pounds because you think that the Pound will increase its value with respect to the Dollar.
If you think that the United Kingdom is not going well in economic terms, but the United States goes well, then you will execute an order/position of sell GBP/USD. Briefly you will sell Pound because you think that the Pound will depreciate its value with respect to the Dollar.
USD/CHF
In this pair, the base currency will be the Dollar , and the quote currency will be Swiss Franc.
If you think that Switzerland's economy does not go well, then you will execute an order/position of buy Dollar, so you think that the Dollar will raise of value against the Swiss Franc.
On the contrary if you think that Switzerland is not going well or some United States economic data has no been good enough, then you will execute an order/position of sell USD/CHF. What means that you will sell Dollars because you think that the Swiss Franc will rise value against the Dollar.
This same principle is been worth for all the economies, with the particularitity of which each economy can be affected in one way or another.
In this way that you would have to decide to sell or to buy a certain currency, with base in macroeconomic data, and remember that every day data release.
As we said earlier, you can keep an open position as long as you want, but you will take care not to lose money, but in the event that you keep an open position, the broker will charge an interest or it will pay interest based in the interest differential between the two currencies which leads to the next point.
El Swap
The Swap, Rollover or Overnight Interest like also is known is the interest that the trader earn or pays when broker depending on its margin and position (it talks about bought amount) in the market.
The Swap is paid or it gains while you hold an open position at the moment at which broker closes the session. In case that you do not want to pay or to gain this interest of your positions, you will have to close the positions that you have open before the 5 p.m. EST since this it is the end of session of the day.
Because when we bought a certain currency, always we sell another one. Each currency has an interest, this interest has to pay it the trader when a currency is sold and it gains when it is bought, as long as the position remains open more than one day. This has given rise to the Carry Trade that we will explain ahead.
However, if the trader has bought base currency with a high interest than the quote currency that the trader is selling, the trader will obtain a benefit derived from the differential of interests of the currencies. Basically that is the Carry Trade.
This is a table of the rates for each currency.
| Currency | Interest | ||
| NZD | 6.75% | ||
| GBP | 4.50% | ||
| AUD | 5.50% | ||
| CAD | 2.75% | ||
| EUR | 2.00% | ||
| CHF | 0.75% | ||
| USD | 3.75% | ||
| JPY | 0.00% |
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