Explanation of Buy and Sell in Forex
In forex trading, there are two main types of transactions: buy and sell. Here is a more detailed explanation along with longer, more detailed examples from everyday life.
Buy
What is Buy?
- In forex, buy means you purchase a currency pair with the expectation that the base currency (the first currency in the pair) will increase in value against the quote currency (the second currency in the pair).
When to Buy?
- You buy when you believe the price of the base currency will rise compared to the quote currency.
Everyday Life Example:
1. Situation:
- Imagine you live in a village known for its mango production. You hear from the farmers that the mango season is coming in a few weeks, and the current price of mangoes is very low due to the abundant supply in the market.
2. Action:
- You decide to buy 50 kg of mangoes at Rp 5,000 per kg. Your total cost is Rp 250,000.
3. Prediction:
- You estimate that in a few weeks, as the supply of mangoes decreases and demand increases, the price of mangoes will rise to Rp 10,000 per kg.
4. Result:
- After a few weeks, your prediction comes true, and the price of mangoes rises to Rp 10,000 per kg. You sell the 50 kg of mangoes you have. Your revenue from this sale is Rp 500,000.
- Your profit is Rp 500,000 - Rp 250,000 = Rp 250,000.
Forex Example:
1. Situation:
- You believe the Eurozone economy will improve, and the value of the Euro (EUR) will rise against the US Dollar (USD).
2. Action:
- You open a buy position on the EUR/USD currency pair at a price of 1.1000. This means you are buying Euros and selling US Dollars at that price.
3. Prediction:
- You predict that the EUR/USD exchange rate will rise to 1.1200 in the future.
4. Result
- If the EUR/USD price rises to 1.1200, you close your buy position. Your profit is the difference between the buy and sell prices (1.1200 - 1.1000 = 0.0200 or 200 pips).
- If you are trading 1 standard lot (100,000 units), your profit is 200 pips x $10 (value per pip for 1 lot) = $2,000.
Sell
What is Sell?
- In forex, sell means you sell a currency pair with the expectation that the base currency will decrease in value against the quote currency.
When to Sell?
- You sell when you believe the price of the base currency will fall compared to the quote currency.
Everyday Life Example:
1. Situation:
- You have 100 kg of rice at home. You hear that the rice harvest season is coming, and the current price of rice is quite high in the local market.
2. Action:
- You decide to sell 100 kg of rice at Rp 12,000 per kg. Your total revenue from this sale is Rp 1,200,000.
3. Prediction:
- You estimate that after the harvest season arrives, the supply of rice will increase, and the price of rice will fall to Rp 8,000 per kg.
4. Result:
- After some time, your prediction comes true, and the price of rice drops to Rp 8,000 per kg. You buy back the 100 kg of rice you need. Your total cost to buy back the rice is Rp 800,000.
- Your profit from this transaction is Rp 1,200,000 - Rp 800,000 = Rp 400,000.
Forex Example:
1. Situation:
- You believe the US economy will improve, and the value of the US Dollar (USD) will rise against the Euro (EUR).
2. Action:
- You open a sell position on the EUR/USD currency pair at a price of 1.1000. This means you are selling Euros and buying US Dollars at that price.
3. Prediction:
- You predict that the EUR/USD exchange rate will fall to 1.0800 in the future.
4. Result:
- If the EUR/USD price falls to 1.0800, you close your sell position. Your profit is the difference between the sell and buy prices (1.1000 - 1.0800 = 0.0200 or 200 pips).
- If you are trading 1 standard lot (100,000 units), your profit is 200 pips x $10 (value per pip for 1 lot) = $2,000.
With these longer explanations and examples, the concepts of buying and selling in forex trading should become clearer and easier to understand.
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