In the following examples, we are going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair.
In this example, the pound is the base currency and thus the “basis” for the buy/sell. If you think the British economy will continue to do better than the U.S. in terms of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the U.S. dollar.
If you believe the British economy is slowing while the American economy remains strong like Chuck Norris, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the U.S. dollar.
When you go to the grocery store and want to buy an egg, you can’t just buy a single egg, they come in dozens or “lots” of 12.
In forex, it would be just as foolish to buy or sell 1 euro, so they usually come in “lots” of 1,000 units of currency (micro), 10,000 units (mini), or 100,000 units (standard) depending on your broker and the type of account you have (more on “lots” later).
“But I don’t have enough money to buy 10,000 euros! Can I still trade?”
You can! With margin trading! Margin trading is simply the term used for trading with borrowed capital. This is how you’re able to open $1,250 or $50,000 positions with as little as $25 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.
Let us explain.
Listen carefully because this is very important!
When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done.
This profit or loss is then credited to your account.
What’s even better is that, with the development of retail forex trading, there are some brokers who allow traders to have custom lots.
This means that you don’t need to trade in micro, mini or standard lots! If 1,542 is your favorite number and that’s how many units you want to trade, then you can !