To start with, you have to know when to buy and sell.
Buying and selling in any market is the key to making money on your investment. In the forex market, the basic rule of thumb is to look to the economies and markets around the world. Another important thing is to always use the base currency as your basis for selling
Let’s look at a scenario: Imagine you’re considering trading in EUR/USD, where EUR is the base currency and USD is the quote currency. Say the U.S. economy is starting to weaken for some reason or another. As the U.S. economy weakens, the USD value will begin to go down. This would be the time to buy EUR.
In this case, you are essentially buying the base with the expectation that, out of the two currencies, the EUR value will grow.
Suppose the opposite is true. If you’re looking to trade in EUR/USD but the economies contributing to the Euro are beginning to suffer. In this case, rather than buying EUR, you would sell EUR with the expectation that the value will be dropping. You would want to sell it for the highest value you can while it’s still up.
A second scenario: Say Japanese investors are pulling money out of the U.S. market and converting it back to yen. If you were trading in USD/JPY, where USD is the base currency that you’re basing your decisions on and JPY – Japanese yen – is the quote currency, you would want to sell USD.
In this case, the impact of the investors pulling their money out of the U.S. market will negatively affect the economy, causing the USD value to drop. This would be another situation where you would want to sell your USD for the highest value you could while it was still up.
In both of these situations, we can see that the economy has a direct impact on the value of the currency connected to the countries being impacted. As the economies shift, so will the value of the currency. Remember, the rule of thumb is to assume a downward turn in an economy will correlate with a decrease in the value of the corresponding currency.